COMMON CAUSES OF DEFAULT IN BUSINESS LOANS IN AFRICA

Default as defined by Consumer Financial Protection Bureau (CFPB) is the failure to repay a loan according to the terms agreed to in the promissory note. In Africa and particularly Ghana most defaults are caused by the clients even though a few are caused by the financial institution thus the lenders and government policies. Most default cases however could be avoided if important factors to consider before accessing a loan are analyzed by the entrepreneur. Most of the default cases caused by client are due to;

DIVERSION OF FUNDS
As a business owner you must have a purpose before accessing a loan since loan amount and duration is given based on this purpose. However, most entrepreneurs usually divert funds into other ventures and in most cases unrelated to their current business. Most of the time since these projects are new, they usually face challenges which affect their cashflow and intends delays loan payments.

SHARING OF LOAN WITH GUARANTOR
Most of the business owners in the micro sector usually share the loans granted with their guarantors without considering if funds would be enough for intended purpose. Secondly these guarantors feels reluctant when it comes to payments of instalments which usually leads to default.

There are instances when these guarantors charge the clients, they guarantee for which reduces the loan amount granted to them and intend affects purpose.

MULTIPLE BORROWING
Currently most of the business sectors in Africa are very competitive hence in a quest for entrepreneurs to have varieties of products to satisfy the needs of their client they access multiple loans without taking into consideration how to repay and since most payments are done monthly they usually have challenges which leads to default.

NO CLEAR PURPOSE
Some other business owners especially those in commerce normally do not have clear purpose before accessing a loan. They usually think once the money is granted there would always be something to invest in which usually is not the case as they end up wasting it hence encounter challenges in payments.

There are some instances where these defaults are caused by the financial institutions and that is why there are business risk microfinance must consider before granting a loan. Below are a few of the mistakes financial institutions make which leads to default;

OVERFINANCING/UNDERFINANCING PROJECTS

Every entrepreneur has a purpose before accessing a loan however most financial institutions sometimes reduce the amount and if funds granted is not enough for purpose then payments becomes an issue which leads to default. It’s also important as a lender to appraise the business of a loan client in order not to over finances their businesses.

DELAYS IN LOAN ADVANCEMENT
When a loan process delays unusually then purpose is most times forfeited especially when project is time bound. Usually most of these entrepreneurs’ access funds elsewhere during the delaying loan process leading to multiple borrowing.

INCREASING LOAN AMOUNT DUE TO PREVIOUS LOAN PAYMENT
Normally most institutions increase loan amount when payments of previous loans granted are prompt but sometimes these increments leads to overfinancing of business which affects payments.

Finally, there are other causes of default which are neither from the entrepreneur or the financial institution and these are;

NATURAL DISASTER
Neither the bank nor the business owner has control over these occurrences and when these events happens stocks are lost, services are halted which leads to default. However, as a financial institution its prudent to secure the loan of your clients to avoid default during these unforeseen circumstances.

GOVERNMENT POLICY
Occasionally the government amends their policies which sometimes does not favor businesses. For instance, if there is a ban on importation of a product, businesses in that sector would be affected which would lead to default.

PERSONAL ISSUES
These issues normally affect the business since owners may not have the physical or emotional strength to operate. Secondly family issues are also capable of affecting business finances which could lead to default.

Defaults affects both client and the institution since loan may not be renewed which affects the portfolio of the institutions though penalty is usually charged for late payments. The client sometimes loses their stocks and assets during asset seizure. It’s important for every entrepreneur to save towards repayments to avoid default.

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