Munich Personal RePEc Archive

Microcredit Loan Repayment Default among Small Scale Enterprises: A Double Hurdle Approach

Abu, Benjamin Musah and Domanban, Paul Bata and Haruna, Issahaku (2017): Microcredit Loan Repayment Default among Small Scale Enterprises: A Double Hurdle Approach. Published in: Ghana Journal of Development Studies , Vol. 14, No. 1 (23 May 2017): pp. 146-165.

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Previous studies that analysed loan defaults have imposed the restrictive assumption that the factors which influence the probability of loan default and the rate of default are the same and with the same direction effects. This study introduces a two-stage approach by applying the double hurdle model to analyse probability of loan default and the magnitude of the default as a way of relaxing this restrictive assumption. Using the model, this study is able to isolate the determinants of default rate from the determinants of the probability of default. The control function approach is used to test and control for potential endogeneity of loan amount and profit in the probability of default equation. The model is applied to primary data from a survey of 200 small scale entrepreneurs in the Upper West Region of Ghana. Results show that enterprise size, interest rate, loan duration, level of profit and loan amount are the simultaneous determinants of probability and rate of default. The study recommends that the National Board for Small Scale Industries should intensify training programmes aimed at enhancing the managerial and technical capabilities of entrepreneurs to ensure healthy and productive management to promote enterprise growth and increase profit margins and hence reduce defaults.

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