Study of default and determinants of informal credit market interest rate: the case of Dar es salaam

This study examined the default and determinants of the informal credit market interest rate in Dar es salaam City. Informal leaders serve the residual market left by the formal and micro finance institutions. The imperfect information attribute by the lack of national identities and information database and poor legal system exposed the lending business to the risks of default. The non probability method was used to select 31 Informal Commercial Money Lenders (ICMLs) operating in the city of Dar es salaam in the period from 2005 to 2007. Two out of these were used in the in depth case study. In addition 40 borrowers who were customers of the two selected ICMLs were randomly selected and included in the sample. The study found features of informal Commercial Money Lenders (ICMLs) being similar to those in the literature. ICMLs operations demonstrated through repeat lending, contract enforcement, screening, and inter-linking helped them only to control strategic default. Further the high informal interest rates were found to be attributed by the monopoly rent administrative costs and the risk premium from both defaulted and delinquent loans. The thriving of ICMLs in the country demonstrates the existence of a huge credit gap. It thus recommended that the government recognizes their operations. Further linkage between formal and informal sectors is now timely so as to remove the credit gap and lower the informal interest rates. Moreover ICMLs are encouraged to form their own association so that they can collectively fight for their recognition and share information among themselves.