Financial Education and Loan Default Behaviour in Rural Microfinance Systems: Evidence from Structural Equation Modelling in Cameroon

Abstract

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