Diversion of Loan Use: Who Diverts and Why?
This paper examines the diversion of microfinance loans intended for income-generated activities to other purposes, and introduces a loan use diversion index.
The paper defines diversion of loan use as the quotient of the difference between the total amount of loan received and the amount used for the proposed purpose. The study examined 2973 loan profile records of poor households in Bangladesh who had borrowed from quasi-formal sources to determine:
- Percentage of households or loans diverted from the proposed purpose;
- Whether loan use diversion is a threat or a positive factor;
- Person responsible for diverting loans from income generating activities and purposes of diversion;
- Policy implications of loan use diversions.
The paper estimates the loan use diversion index at each profile level to gauge degree of diversion of each loan use. It determines the weighted loan diversion index to analyze characteristics of loan diversion at the household level. The paper states that loan use diversion is a threat to households and MFIs since a significant portion of loans is diverted to unproductive activities.
