Microfinance repayment performance of SMEs in Indonesia: Examining the roles of social capital and loan credit terms

Abstract

Researchers and practitioners have been interested in exploring factors that promote loan repayment. This study examines the influence of social capital (i.e., the ties between lenders and borrowers) and the loan credit terms (i.e., interest rates, loan size and repayment time) on Microfinance repayment performance of small and medium enterprises (SMEs) in Indonesia. The study also tests whether business performance serves as a mediating variable of the relationships between social capital, loan credit term and repayment performance. Based on the data collected from 215 SME owners in East Java, the results showed that social capital had a direct effect on performance (β = 0.23, p < .01) on SMEs' repayment performance, whereas favorable loan credit terms had an indirect effect on repayment performance through an improvement in business performance (95% CI [0.17, 0.43]). These findings suggest that social capital could serve to establish mutual trust between the lenders and borrowers, which could help reduce loan delinquency. Along with this, the flexibility in obtaining financial capital could indirectly affect loan repayment by improving the borrowers' financial performance. © Behavioral Science Research Institute.