Determinants of Microfinance Loan Default: An Empirical Investigation in Sri Lanka

The purpose of this research is to explore the factors that influence microfinance loan default in Sri Lanka. Both a deductive and a quantitative approach were employed. A structured questionnaire was designed by 5 Likert-scale. Questionnaires were distributed among 133 microfinance loan borrowers in the region of the Matugama Divisional Secretariat using convenient sampling. SPSS version 22 used to perform the exploratory factor analysis. The findings of this study confirmed three factors useful to explain microfinance loan default in Sri Lanka. These are the actions of the Microfinance Institute to control loan defaulting; the characteristics of the borrowers’ family and loan group; and macro-economic issues. The findings of this study could be used by managers of Microfinance Institutes to manage their credit risk and customer portfolio. Certain policy implications such as possibility of granting access to Credit Information Bureau of Sri Lanka, accessing credit history of customers and government decisions directing Microfinance Institutes to request securities from its customers are few of them.