Modelling the Socio-demographic Determinants of Loan Default Risk of Individual Borrowers: A Survival Analysis Approach

Loan default is a growing concern to financial institutions globally. The situation is worst for rural banks and micro-finance institutions undertaking rural and small-scale financing in Ghana, a Sub-Saharan African country, and by extension Africa as a whole. Although stringent measures are set to ensure maximum recovery, loan default remains a great challenge to financial institutions. This study applied methods of survival analysis to monthly survival data for 270 individuals, to examine the determinants of risk of loan default. Occupation was found to have the highest statistically significant impact on the formulated model, followed by sex, marital status, and then age. There were statistically significant differences among the three levels of occupation and two levels of sex: Individuals into formal occupation posed the least likely of risk to default, followed by those into informal–commerce and foods, and then those into informal-trades. Males were more likely to risk of default compared with females. Age and marital status showed some statistically significant impact on the model only in the presence of occupation and sex. However among the levels of age and marital status the risk of default is similar. From the results, banks, policy makers or risk managers may have the highest likelihood of loan recovery when they consider giving loans to individuals based on occupation rather than sex, marital status and age. The results further show that individuals into formal occupation should be prioritised compared to those into informal occupation.