Abstract:

Lenders and investors are exposed to default risk in virtually all forms of credit transactions. For the micro-finance industry in Ghana, this risk is the most critical to the sustainability of their operations. Microfinance Institutions (MFIs) can mitigate the impact of default risk on their businesses by engaging in Default Risk Management practices that are effective and reliable for their operations. In view of this concern, this study set out to examine the effects of loan default on the sustainability of a microfinance institution in Ghana by using Express Savings and Loans Company (ESLC) as a Case Study. By using trend analysis on financial records of ESLC this study established the effects of the relationships between default loans of the company and interest income, operating profit and operating margins of ESLC. The study revealed that the relationship between default loan and all variables used over the period 2009-2013 were erratic in nature. This poses critical sustainability issues for the company. To understand the trends in the incidence of default in the company few qualitative interviews were conducted with some managers of the company. It was established that the lack of monitoring of loan and high turnovers of loan officers were the main factors that significantly influence the incidence of default loan at ESLC. In reality, MFIs derive most of their interest incomes from loans, yet, not all loans granted to their clients perform well and earn the expected returns. This tends to have adverse effect on the quality of the loan portfolio. The study recommends that to minimize these effects the following measure must be in place at ESLC: effective monitoring of loans, credit training programs, and seeking the services of credit reference bureaus and private debt collectors. 

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