Determinants of Repayment Behavior of Microfinance Customers

The main objective of the study was to examine the determinants of the repayment behavior of microfinance customers in Tanzania. Predictable variable of Incentives joint liability and regular group meeting were hypothesized to test the influence of the repayment behavior of microfinance customers. The study used two theories to understand the situation which is information asymmetry theory (Akerlof-1970) addresses imperfect information and carrot and Stick theory (Jeremy Bentham) which addresses rewards and punishments. The survey was conducted for 251 microfinance clients from different institutions where mostly are beneficiary of group loans questionnaires were analyzed using descriptive and regression analysis. Factors analysis conducted using the principal component analysis (PCA) to test correlation between items and reduce to four factors. All variables were positive correlated and statistically significant. Regression analysis shows that there is a positively and statistically significant relationship between joint liabilities. Incentives (independent variable) and repayment behavior of customers. Also it has shown that regular meetings have a positive relationship but not statistically significant to repayment behavior. Therefore, the study recommends MFI to adopt joint liability and incentive mechanism and conducting regular meetings. These shall improve customer’s repayment behavior. The study also contributes to policy makers and regulatory authority to see importance of formulating and registering community groups which shall the legally recognized and facilitate to access needed loans from MFI.