CHAPTER 2

REVIEW OF RELATED LITERATURE AND STUDIES

This chapter contains the review of related literature and studies that are gathered from the internet, and other references
which are relevant to the present study; these sections also consist of the synthesis of the state of the art, gap bridged by the
study, theoretical paradigm, conceptual framework and definition of terms.

RELATED LITERATURE

Foreign Literature

According to Chua and Tiongson on their study on Multiple borrowing in the Philippines, represents a pilot effort to
understand the incidence of multiple borrowing and its correlates
in a particular community. It complements other data sources, reflecting different notions of multiple borrowing and strengths
and weakness in the quality of information collected.

The data suggest that MFI households represent only a small fraction of households in this community. Among MFI
households, the incidence of multiple borrowing is large, if by multiple borrowing we mean borrowing from all possible sources
of credit. If by multiple borrowing we mean borrowing from other MFIs, not a single MFI household in the sample report
themselves to be borrowing from multiple MFI sources. This could be due to sampling error or households could be deliberately
providing false information. Data from the other data collection effort – branch client data – can serve to validate this finding.

Multiple borrowing appears to be consumption and crisis-driven, with few of the households reporting that the multiple
loans are being used explicitly for business purposes. This is associated with a relatively large fraction of households (about a
fifth) missing payments over the months preceding the survey. However, there is limited evidence to suggest that multiple
borrowers are substantially more delinquent than the average indebted household

According to Diaz, Estoesta, Ledesma, Meneses, and Onesa on their study on Multiple Borrowing in the Philippines
(February 2011), found strong evidence of the occurrence of multiple borrowing among urban-based women micro
entrepreneurs. Close to half (65
women) of the sample acknowledged having current loans with two lenders (65% of the multiple borrowers) or with three or
more lenders (35%).Most of the multiple borrowers obtain their extra credit from non-bank financial institutions (43.94%) like
MFIs, followed by family members and relatives (30.30%), and individual moneylenders at 24%.This indicates that the
availability of many MFIs in the urban area do facilitate the incidence of multiple borrowing. The average loan principal for all
respondents is P10,423 while multiple borrowers register a higher average of nearly P17,000. This data suggests incremental
loan/s falling within the average loan size range of the total sample. This may indicate some form of control exercised by
multiple borrowers or by the lenders. Multiple borrowers are quick to point out the many advantages of having access to loans.
In particular, having money when you need it has been found to help sustain business operations, keep children in school, and
provide support to families in distress due to medical emergencies, for example. For all its advantages, multiple borrowers do
acknowledge the stress and mental burden that go with multiple borrowing when money is tight and there is not enough to go
around to meet the needs of the family, business and lenders. Thus, only a small 20% among them would endorse getting into
multiple borrowing, offering a further advice of only doing so if money will be put to good use.

Debt has Become a Burden for Some This study also found evidence of over-indebtedness, with 60% of the multiple
borrowers struggling to meet the weekly debt servicing rate higher than 20% of gross weekly income. Further affirming the
emergence of over-indebtedness is the use by 5% of multiple borrowers of a loan to pay off another loan.
If this goes unchecked, in the long term, instead of leading better lives, these clients will only experience more hardships.
Implications for MFIs 1.Based on the book Portfolios of the Poor,11the financial activities of low income families are usually
driven by 3 main needs: (1) Managing basics: cash-flow management to transform irregular income flows into a dependable
resource to meet daily needs; (2) Coping with risks: dealing with the emergencies that can derail families with little in reserve;
and (3) Raising lump sums: seizing opportunities and paying for big-ticket expenses by accumulating usefully large sums of
money. The respondents in the study have raised similar financial needs that can be categorised into 3 main groups: (1) business
and other income generating activities;(2) for basic needs of the family, especially educational expenses of children; and (3) for
meeting emergencies such as sickness and accidents that
require hospitalisation. These needs are varied. They are also irregular and some very risky, though some seasonality can be
predicted for some major needs like tuition fees for children’s education. In addition, there are needs that are paid in bulk, for
example in medical emergencies, which may impact a client’s cashflow. This calls for MFIs to adopt strategies that are more
responsive to the needs of the market.

2. The MFI clients employ systems to avoid excessive debt burden. If they have to get into multiple borrowing, they only
borrow small amounts or they try to borrow loans with terms that make repayment affordable and at lower cost. Not all
members of the target group exercise prudent money management however. This calls for MFIs to adopt strategies to protect
clients, from over indebtedness for instance, while at the same time offering an array of products and services to meet their
needs.
According to Kumar, Dr. Rahul on his study on Understanding Customer Behavior of Multiple Borrowing Through Prospect
Theory, The phenomena of multiple borrowing in microfinance clients are widely prevalent so much so that it has become a
major cause of concern and challenge for the microfinance industry. The researches have been sparse to create an understanding
of why would microfinance clients take out multiple loans. Some of the empirical researches attempted to delve into the
potential causes and it includes a mismatch between the size of the loan and the business/personal needs of the clients, a lack of
financial sense or the clients’ oversight, among many other reasons. The lack of research work to create theoretical
understanding on the subject motivates the present research. The present research aims at understanding the client behavior
which leads to multiple borrowing through widely applicable theories on behavioral finance “Prospect Theory”. To achieve the
objective, the research is designed to explain the theory and then inference of the theory is drawn to identify the underlying
causes prompting the risk seeking behavior of the person that result into the situation of multiple borrowing. The future research
can seek to validate the findings with the research experiments on the microfinance borrowers. The understanding has important
implications to design an appropriate mechanism to control multiple borrowing to the microfinance clients and also to make
more reliable assessment of credit risk of the customers. The multiple microfinance agencies are acting as a catalyst in
encouraging risk seeking approach of the borrower.

According to Ghate (2007), 92% of poor households in Andhra Pradesh had been covered by March 2005 by the state SHG
programme (Velugu), with plans to reach 100% by 2005 end. Surveys by APMAS found that in Guntur, dual membership was
as high as 67%, and that 32% of the respondents had multiplememberships with Velugu, Spandana and SHARE in 2005. In
2006, the Krishna survey
found that multiple memberships in the three had increased to 82%. Despite the presencein the area, of two large fast expanding
MFIs, new local MFIs were starting up.

Interestingly, during the proliferation of MFIs, 18% of clients had borrowed from money lenders to repay MFI loans, although
the average loan size of Spandana clients had dropped in 2006. Hence depth of outreach has not suffered in AP. Abusive
collection practices have also been adopted in AP. M-CRIL’s social ratings tool to measure social performance defined as ‘the
effective translation of mission into practice, in line with acceptable social values’ will help address social mission drift
concerns.

Despite the better services of MFIs over SHGs, such as timeliness and size of loans, there was little switching of clients from
SHGs toMFIs. This is because SHG membership comes with access to development programmes and services, suggesting that
sticking to the social mission goals confers client loyalty benefits. There was little evidence of client poaching from the survey
in Krishna district since the model makes it difficult to switch institutions. Preference for individual loans was cited in the
survey as the biggest reason for SHG clients to join MFIs, while weekly repayments was the most common problem with
borrowing from MFIs.

Local Literature

This study sought to establish the effects of multiple borrowing on the living standards of microfinance clients at Kenya Women
Finance Trust, Trans Nzoia Region.. The study was guided by the Grameen model has been used as an ideal theory for
microfinance. Descriptive research design was used to elicit data from 47 clients from 8 groups with the micro finance who had
been selected to form the study sample representative due to homogeneity. Structured questionnaires and document analysis
were the main data collection tools. Validity and reliability of these instruments was established through conducting a pilot
study and getting expert opinions. The collected data was then coded and analyzed using the SPSS version 16 computer
program. Descriptive statistics such as frequencies, percentages and standard deviations and Inferential statistics such as
Pearson’s Product Moment Correlation Coefficient test was used in the qualitative and quantitative analysis of data. The study
therefore concluded that major reasons for multiple borrowing were insufficient loans from MFIs, loan recycling, and family
obligations. Over 70% of the respondents had problems in loan repayment because of multiple pending loans. Its found that
education level and number of dependents of the respondent significantly influenced the number of loan contracts. As was
explained in the analysis section, the study concluded that there is a strong relationship between multiple borrowing and
investment of client’s variables which implies that if income increases, the client’s ability for savings also increases. If the
savings increase, then there will be a positive impact on financial situation of the family. The study recommends that In
order to control the incidences of multiple borrowing we recommend that Micro finance institution should devise a way of
sharing clients’ loan information. In addition, Micro finance institution should provide adequate loans so as to avoid the practice
of clients to reapply to other MFIs to meet their requirements. Some form of training should also be provided to help clients
distinguish between business and family matters.

In order to achieve this purpose, objectives were formulated which included to examine the effects of multiple borrowing on
investment of clients; to determine the effects of multiple borrowing on health and safety of clients and to find out the effects of
multiple borrowing on income levels of clients

Keywords: Investment; health and safety; income levels and multiple borrowing

RELATED STUDIES

Foreign Studies

Risks in multiple micro borrowings

InpaperMagazine (2011), ALMOST all microfinance institutions and banks are piling up non-performing loans because
of depressed economic conditions, rising inflation and growing trend towards multiple borrowings by clients.

The prudential regulations make it mandatory for the prospective borrower to declare existing borrowings as the
requested limit for the new loan has to be within the prescribed total loan liability of a person.

The presence of multiple microcredit providers, who do not come under the purview of microfinance prudential
regulation prompts borrowers to borrow from more than one institution. Normally field staff of microfinance institutions
(MFIs), microfinance banks (MFBs) and NGOs operating in the same market segment are booking maximum number of loans
to achieve the set target.

On the other hand, persistent downturn in overall economic growth and steep rise in cost of living as well as cost of doing
business has forced small borrowers to avail additional loans beyond prescribed maximum limit from micro finance providers in
their area. A survey by the Consultative Group to Assist Poor (CGAP) – a World Bank's Research entity---- revealed that
incidence of multiple borrowings is high in big cities like Karachi, Lahore, Islamabad and Hyderabad where new businesses
have better marketing opportunities for their products and at the same time they need consumption loans to cope with steep rise
in food prices, transport cost, rising education and health care expenses needed for family members.

This tendency towards multiple borrowings in the face of falling purchasing power of borrowers entangles them in
whirlpool of non-performing loans. The survey also revealed that multiple borrowing cases can be detected in area of group
lending where activities of each borrower are known to all other group members.

Findings show that two of each five borrowers in these big cities like Rawalpindi, Lahore and Karachi were involved in
multiple borrowing also because of substantial increase in cost of production and marketing of products including raw material,
high electricity and gas tariffs.

Depressed economic growth and substantial fall in purchasing power of all segments of society impacted adversely on
marketing of small businesses products. Delayed marketing of micro business products slows down the cash conversion cycle
(from the stage when investments are made till products come out and sold in the market) as such borrowers resort to additional
borrowings that normally becomes unmanageable for them and a break-down occurs in their repayment cycle, resulting in non-
performing loans.

Sometimes borrowers are prompted to borrow from more than one micro lending agency just to adjust/repay loan of an
MFI or MFB, when it becomes overdue for repayment. This phenomenon is common in emerging economies, particularly India,
where in certain provinces like Andhra Pradesh, micro-financing industry is in distress mainly due to very high interest rate
charged and unethical strategies applied for loan recovery from micro borrowers, compelling clients to resort to multiple
borrowing. Accordingly, central bank of India has placed cap on interest rate to be charged from small borrower

Multiple borrowings are common with self-help group (SHG) mode of financing, where number of borrowers exceeding
20 form a group and collect savings, which they utilise for financing business and consumption needs of group borrowers by
charging above market rate interest in view of high transaction cost involved and also because of fast cash conversion cycle of
micro businesses financed.

Multiple borrowings are on increase in micro finance sector due to existence of such MFIs and SHGs from where loans
are easily available to clients of micro finance banks.

Increasing competition among various lenders results in disbursing loans even to such delinquent micro borrowers having
outstanding loans with micro finance banks. In Bangladesh where micro financing flourished with leaps and bounds, there are
evidences of recycling of micro loans by Grameen Bank and other MFIs just to display high rate of recovery.

A survey conducted in 2007 by Krishna Swamy, an eminent economist, revealed that 27 per cent of multiple borrowings
by micro borrowers were used for repaying loans of other MFIs and SHGs and to smoothen business cash flows. 'Big' enough
loans to meet requirements of growing micro businesses are preferred by borrowers despite comparatively higher rate of mark
up which is less than higher transaction cost involved in borrowing from more than one source.

Incidents of multiple borrowings occur when a borrower moves to conventional banks for higher credit limit to manage a
sustainable growth in business for which the lenders assess the borrower on their own risk parameters. The borrower, in case of
his failure to get additional loan from a conventional bank, either borrows from an NGO/MFI or abandons the idea of business
expansion altogether.

In fact, multiple borrowing has become a growing trend in micro finance sector all over the globe. Now it will not be
wrong to say that loan repayment surety to some extent depends on borrower's ability to raise a new loan to repay the prior loan
/ loans. If a client is provided with the right size loan, it could curb the potential debt delinquency.
 As such, microfinance sector as a whole needs to strike a balance between maximum loan size, lending risk and an
average loan giving agency capacity to meet needs of micro businesses and get rid of multiple borrowings.

The rising number of microfinance providers has led to a drastic increase in competition. On one hand, this has
enabled microfinance clients to have a wider choice of services as from which MFI to take a loan. On the other
hand, anecdotal evidence and our own observation show that the increasing number of MFIs has tempted clients to
take more than one loan at the same time resulting into multiple loans. Incidences of one client with five different
loans at the same time are not uncommon. Literature shows that multiple borrowing for low-income clients is said to
increase incidences of over-indebtedness and consequently default on loans (Gwendolyn, 2001; Vogelgesang,
2003). As such, multiple borrowing can sometimes make clients poorer and at the same time threaten the
sustainability of MFIs (Gwendolyn, 2001; Vogelgesang, 2003).

This study, therefore, analysed the incidences of multiple borrowing, reasons for multiple borrowing, and effects of
multiple borrowing on loan repayment at Iringa municipality in Tanzania. Currently, Iringa municipality is estimated to
have a population size of about 120,000 people (NBS, 2007) with over 10 microfinance providers excluding Savings
and Credit Cooperative Societies (SACCOS) (MBF, 2010).

The first and most common response in the sector has been two words: credit bureau. And it’s of course the right one, since this
can be one of the key tools in assessing a client’s existing debt burden. But credit bureaus only provide the information – they
can’t by themselves change lending practices or perceptions. And they will do nothing to help with the loss-making economics
of first-time borrowers. If anything, one can expect multiple borrowing to increase with the introduction of credit bureau data,
which improves MFIs’ ability to target clients with existing repayment histories, that is to say, with existing loans.

In truth, the most appropriate response is the one the Smart Campaign has identified – preventing over-indebtedness. Yet it’s
also a more difficult response than setting up a credit bureau. The problem, as is so often the case in microfinance, is that it’s
not a response that can be effectively implemented by any one MFI. The most obvious example of this is the case of the “bad
actor.”

In the last three decades, the microfinance industry has witnessed a substantial growth accompanied by a high incidence of
multiple borrowing among its clients in developing and emerging market economies. On one hand, multiple borrowing, simply
defined as taking multiple loans from multiple sources simultaneously, is considered to be a common and optimal cash flow
management strategy of low-income households in developing countries. Low-income households take multiple loans from
multiple sources to (1) smoothen their cash flow on regular bases (2) acquire larger loans than a micro-lender offers when
creditworthy, (3) manage inflexible loan repayment schedules of microfinance institutions when faced with unexpected adverse
shocks (Chen et al., 2010; Schicks and Rosenberg, 2011; Guérin,2012 and Wampfleret. al., 2014). On the other hand, multiple
borrowing is becoming increasingly perceived as a symptom of household’s over-indebtedness. Through multiple borrowing,
households can (1) increase the amount of loan that they can borrow and accumulate more debt than they can repay, (2) simply
refinance or turn-over existing loans that are ultimately un payable and enter into a vicious circle of debt and dependency, (3)
easily default on a loan from one micro-lender while still keeping their borrowing relationship with other micro-lenders and
meeting their financial needs elsewhere (Chen et al., 2010 and Schicks and Rosenberg, 2011).

LOCAL STUDIES

Discovering what clients and potential customers want and need in any specific market segment is essential for successful
product development. Market research sets out to achieve these goals by collecting and analyzing data, thus helping
institutions better understand and serve potential and This study aims to describe the nature and extent of multiple borrowing
among Filipino women micro entrepreneurs. It hopes that by making information available local MFIs can gain insights on this
practice and pursue mitigating strategies to keep multiple borrowing from leading to over-indebtedness among the low income
group. The study administered a detailed questionnaire to 151 urban women micro entrepreneurs with outstanding loans from
Tulay sa Pag-unlad, Inc. (TSPI), an MFI in the Philippines. Main findings of the study include:

 Average loan principal for all respondents is PHP 10,423 while multiple borrowers register a higher average of nearly
PHP 17,000;
 Close to half (65 women) of the sample acknowledged having current loans with two lenders (65 percent of the multiple
borrowers) or with three or more lenders (35 percent);
 Evidence of over-indebtedness, with 60 percent of the multiple borrowers struggling to meet the weekly debt servicing
rate higher than 20 percent of gross weekly income.

The study concludes that not all members of the target group exercise prudent money management. Therefore, MFIs need to
adopt strategies to protect clients from over indebtedness, while at the same time offering an array of products and services to
meet their needs. existing markets.

Research may be both quantitative and qualitative—investigating either the supply or demand side of a particular market. While
the empirical data central to quantitative research provide a useful basic understanding of market characteristics, it is often the
narrative aspects of qualitative research that provide deeper insights into client behaviour and add important perspective and
detail to the overall picture.

The more an institution knows its clients and understands its market, the better it will be in producing products and services to
meet demand. Market research and product development are crucial investments that can be managed in-house if expertise and
capacity are available, or in coordination with consulting companies that specialize in these areas.

Consumer protection refers to rules and regulations designed to safeguard customers when they are dealing with financial
service providers and to inspire confidence in these institutions. The implementation of consumer protection rules and practices
is just beginning in many countries, although consumer protection has gained more prominence in recent years with the global
financial crisis and concerns about over-indebtedness.

Transparency, fair treatment, and effective recourse are especially relevant for low-income consumers when it comes to
consumer protection. Clients must be able to understand the implications of commitments they make; information must be
presented clearly and simply; and there must be a satisfactory method in place for resolving conflicts or disputes.

Implementing consumer protection practices may take time and is likely to evolve as new risks are identified, consumer
behaviour is better understood, and effective regulatory design is implemented.

Synthesis of the State of the art

The development of the Municipality should be the primary concern of elected officials. It is important that pressing problems
be solved and given adequate response the creation and implementation of adequate programs should be the prime objective
of the government in order to solve existing problems.

The literature herein reviewed emphasized that any borrowers implemented must win the support of the local constituents
.Community development plans are inaugurated for the purpose of uplifting the lives and improved the standard of living of
the people.
The related studies reviewed revealed that community involvement in the implementation of borrowers. Some studies found
out the lack of needs, sustainability, poverty community participation, ineffective officials were some reasons why programs
and borrowers aimed and development couldn’t materialize. To find away to solve all these pressing problems related to
community development, the government should actively be involved.

Gap Bridged by the study

A review of the literature and studies showed aspects similar to the current study, in the areas of sustainable and borrowers
but the research had made thorough analysis, it was found out that none of them studies about the sustainable and multiple
borrowings program of microfinance borrowers in the Municipality of Daraga, Albay. This is the gap which the study attempts
to bridged

Theoretical Framework

This study is the relationship between internalization of ISO 9000 practices and the development of intellectual capital within
organization we posit that intellectual capital , which comprise human capital, organization capital, and social capital, leads to
improve process in organization process improvement, in turn, result in superior operational performance. The result model as
follows:

Using a sample of 321 ISO 9001 certified organization. The hypothesized relationship are tested by means of the structural
equation modelling technique. The result of this study show the performance benefits from the internalization of ISO 9000
standard occurs mainly through the development of human and organizational capital, and the co