Microfinance Loan Default in Sri Lanka: A Case Study of Matugama Division

The purpose of this research is to explore the factors that influence microfinance loan default in
Matugama Division, Sri Lanka. Both a deductive and a quantitative approach were employed. A
structured questionnaire was designed by 5 Likert-scale. Questionnaires were distributed among 133
microfinance loan borrowers in the region of the Matugama using convenient sampling. SPSS version
22 used to perform the exploratory factor analysis. The findings of this study confirmed three factors
useful to explain microfinance loan default in Sri Lanka. These are the actions of the Microfinance
Institute to control loan defaulting; the characteristics of the borrowers’ family and loan group; and
macro-economic issues. The findings of this study could be used by managers of Microfinance
Institutes to manage their credit risk and customer portfolio. Certain policy implications such as
possibility of granting access to Credit Information Bureau of Sri Lanka, accessing credit history of
customers and government decisions directing Microfinance Institutes to request securities from its
customers are few of them.