Risk-return trade off and loan default consideration in lending decisions: a case study of whence financial services.
Date
2020
Authors
Chikweti, Henry Lukama
Journal Title
Journal ISSN
Volume Title
Publisher
The University of Zambia
Abstract
In a bid to construct a decision-making model to remedy the contradictions encountered in
lending decisions, the study explored the dysfunctionality caused by risk-return and loans default
considerations in lending decisions. Whence Financial Services, a microfinance institution was
selected as a case study on the basis of being a good representative of the type of institutions that
have exploited the niche under review in terms of size, capacity and range of services offered.
Documentary review, survey questionnaire, in-depth interviews and a workshop were used to
collect data for the study. Through analysis of this data, the study found that the dysfunctionality
was primarily due to risk considerations and the risk was mainly due to information asymmetry
between lenders and borrowers. Therefore, the decision-making model was constructed through
establishment of a series of actions to be taken before a lending institution settles for guidelines
to inform lending decisions, subject to the information asymmetry challenge. The model ensures
the risk is managed through weaving together risk management measures to deal with the
information asymmetry. The study established that the risk of default was at about 36% and this
was way too high compared to the 2% residual risk internationally accepted for microfinance
institutions. Therefore, in order to reduce this risk to acceptable levels, the Government and the
central Bank of Zambia (BoZ) should take keen interest in local microfinance start-ups which
usually start out operations using the money lenders certificate and support them through
regulation and constant monitoring. This would greatly help in managing their risk exposure
which is core to the dysfunctionality under review which continues to adversely affect the entire
finance industry through moral hazard, adverse selection and excessive indebtedness. This is
because such a development would increase customer and other stakeholder confidence in the
microfinance institutions and this in turn would be vital as it would enable microfinance
institutions to collaborate with other stakeholders, a development central to resolving the
information asymmetry constraint.
Keywords: Risk, Loans default, Microfinance, moral hazard, adverse selection, excessive
indebtedness and information asymmetry.
Description
Thesis
Keywords
Microfinance--Zambia , Excessive indebtedness and information asymmetry--Zambia