Entrepreneurship, Default, and the Problem of Development Finance

A section of the borrowers of funds from public investment finance enterprises in some developing countries like Bangladesh are found not to use the funds for the stated business purposes and deliberately to default on the loans, creating severe stress for development finance. The argument in this paper is that when the expected pay-off from simply usurping the loan money is greater than that from investing in the stated business, the borrowers have a strong incentive deliberately to default. The default syndrome arises from, and is sustained by a lack of sufficient entrepreneurial skills in these borrowers and the inadequacies of the institutional infrastructure in enforcing contractual obligations. The former implies that the profit to be earned from business is low, while the latter ensures a light, if any, penalty for default.