article · Zenodo (CERN European Organization for Nuclear Research)
Microfinance institutions face significant operational risk when their clients lack financial literacy. An investigation examined how financial education impacts loan default rates using data from loan officers across sixty microfinance institutions affiliated with CamCCUL in the North West Region of Cameroon. Analysis through structural equation modelling established that deficits in financial knowledge play a major role in non-repayment. Specifically, a lack of education in money management, debt management, and financial negotiations accounts for 49.2 percent of the loan default rate observed in these institutions. Providing targeted instruction in these financial capabilities enables clients to manage their financial obligations more effectively. Consequently, increased investment by institutional management into client training programmes directly reduces the frequency of missed payments and improves loan recovery outcomes for rural microfinance organisations.
Loan defaults threaten the operational viability of microfinance institutions serving rural communities. Demonstrating that nearly half of default rates stem from gaps in client financial knowledge highlights a clear intervention pathway. By identifying money management, debt handling, and financial negotiations as crucial competencies, institutions can implement practical educational measures that protect lender solvency whilst supporting borrower financial health.
The findings offer applied empirical guidance for microfinance management, financial service providers, and development organisations seeking to reduce portfolio risk. The identified educational domains, covering money management, debt control, and negotiation skills, can be developed into structured client onboarding and training curricula. As an applied observational study, the work provides evidence ready for integration into credit risk management procedures and client training programmes within rural banking systems.
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Abstract The biggest operational threat to microfinance institutions is likely the absence of financial education for MFI clients. This study attempts to investigate the effect of financial education of MFIs' clients on the rate of loan default. The study employed an opportunistic sampling technique to source data from loan officers of 60 randomly selected microfinance institutions affiliated to CamCCUL in the North West Region of Cameroon. The collected data were analysed using the SMART PLS software program and Microsoft Excel. The Structural Equation Model (SEM) was used to establish the effects of customers’ financial education on loan default rate. The results from the SEM regression coefficients revealed that the lack of money management education, debt management education and financial negotiations education by MFIs' clients contributes 49.2% to the loan default rate in MFIs. Therefore, if these MFIs invest more in educating their clients on financial education skills, the loan default rate will decrease. The study, therefore, recommended that the management of MFIs should invest in the financial education of their clients, as this will go a long way to increase their ability to handle their financial obligations, thus reducing the loan default rate. Keywords Customers’ Financial EducationLoan Default RateMicrofinance clientsMicrofinance institutions and Structural Equation Model
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DOI: 10.5281/zenodo.22055481
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