Determinants of Loan Default of Low-Income Borrowers in Urban Informal Credit Markets: Evidence from Dhaka City

Abstract

A major problem for credit markets is to discover the factors that are responsible for the non-repayment of loans. This study identifies the factors which are liable to loan default in urban informal credit markets. A questionnaire survey was conducted among four hundred low-income people in Dhaka city who took loans from informal credit markets. A logistic regression was used to find out the factors which cause loan default in these markets. The results show that loan default is strongly related to interest rate, size of loan, loan diversion, and collateral of loan. In addition, multiple sources of income, borrower’s monthly income, education and age play important roles in this regard. The identification of the factors affecting loan default is expected to help the loan providers of both informal and formal credit markets to reduce default loans and establish discipline in financial markets.

Keywords: Determinants; Loan default; Low-income borrower; Informal credit market; Dhaka

DOI: 10.7176/EJBM/11-26-10

Publication date:September 30^th 2019