Microfinance Repayment Performance of SMEs in Indonesia: Examining the Roles of Social Capital and Loan Credit Terms

Main Article Content

Saparila Worokinasih Wisanupong Potipiroon


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.


Article Details

How to Cite
Worokinasih, S., & Potipiroon, W. (2019). Microfinance Repayment Performance of SMEs in Indonesia: Examining the Roles of Social Capital and Loan Credit Terms. The Journal of Behavioral Science, 14(1), 28-45. Retrieved from https://www.tci-thaijo.org/index.php/IJBS/article/view/150625
Research Articles
Author Biographies

Saparila Worokinasih, Brawijaya University, Indonesia

PhD Candidate at Faculty of Management Sciences, Prince of Songkla University, Hat Yai, Thailand. Lecturer at Brawijaya University, Indonesia.

Wisanupong Potipiroon, Faculty of Management Sciences, Prince of Songkla University, Thailand

Assistant Professor and Director of PhD Program in Management, Faculty of Management Sciences, Prince of Songkla University, Hat Yai, Thailand


Anderson, F. (2002). Taking a fresh look at Informal Finance, In D. W., Adams & D. A. Fitchell (Eds.). Informal Finance in Low-Income Countries. Boulder, CO: Westview.

Anderson, J. C., & Gerbing, D. W. (1988). Structural equation modeling in practice: A review and recommended two-step approach. Psychological Bulletin, 103(3), 411-423.

Awunyo-Vitor, D. (2012). Determinants of loan repayment default among farmers in Brong Ahafo Region of Ghana. Journal of Development and Agricultural Economics, 4(13), 339-445.

Bagozzi, R. P., & Yi, Y. (1988). On the evaluation of structural equation models. Journal of the Academy of Marketing Science, 16(1), 74-94. doi: 10.1007/BF02723327

Baron, R. M., & Kenny, D. A. (1986). The moderator–mediator variable distinction in social psychological research: Conceptual, strategic, and statistical considerations. Journal of personality and social psychology, 51(6), 1173.

Bastelaer, T. V., & Leathers, H. (2006). Trust in lending: Social capital and joint liability Seed Loans in Southern Zambia. World Development, 34(10), 1788-1807.
doi: 10.1016/j.worlddev.2006.02.007

Besley, T. (1995). Nonmarket institutions for credit and risk sharing in low-income countries. Journal of Economic Perspectives, 9(3), 115-127. doi: 10.1257/jep.9.3.115

Bhatt, N., & Tang, S. Y. (2002). Determinants of repayment in microcredit: Evidence from programs in the United States. International Journal of Urban and Regional Research, 26(2), 360-376. doi: 10.1111/1468-2427.00384

Cassar, A., Crowley, L., & Wydick, B. (2007). The effect of social capital on group loan repayment: Evidence from field experiments. The Economic Journal, 117(517), F85-F106. doi: 10.1111/j.1468-0297.2007.02016.x

Coleman, J. S. (1998). Social Capital In The Creation of Human Capital. American Journal of Sociology, 9(1988), S95-S120. doi: 10.1086/228943

Davidsson, P., & Honig, B. (2003). The role of social and human capital among nascent entrepreneurs. Journal of Business Venturing, 18(3), 301-331. doi: 10.1016/S0883-9026(02)00097-6

Derban, W. K., Binner, J. M., & Mullineux, A. (2005). Loan repayment performance in community development finance institution in the UK. Small Business Economics, 25(4), 319-332. doi: 10.1007/s11187-004-6483-y

Dixon, R., Ritchie, J., & Siwale, J. (2007). Loan officer and loan ‘delinquency’ in microfinance: A zambian case. Accounting Forum, 31(1), 47-71. https://dx.doi.org/10.1016/j.accfor.2006.11.005

Dufhues, T., Buchenrieder, G., Euler, D. G., & Munkung, N. (2011). Network based social capital and individual loan repayment performance. Journal of Development Studies, 47(8), 1199-1215. doi: 10.1080/00220388.2010.547936

Eze, C., & Ibekwe, U. (2007). Determinants oh loan repayment under the indigenous financial system in Southeast, Nigeria. The Social Sciences, 2(2), 116-120. Retrieved from https://medwelljournals.com/abstract/?doi=sscience.2007.116.120

Fatoki, O. O. (2011). The impact of human, social and financial capital on the performance of small and medium-sized enterprises (SMEs) in South Africa. Journal of Social Sciences, 29(3), 193-204. doi: 10.1080/09718923.2011.11892970

Ferdausi, T., Sarker, S., & Rahman, M. (2014). An analysis of strengths & weakness of SME financing program in Bangladesh: A study on Social Islamic Bank Ltd. Research Journal of Finance and Accounting, 5(2), 51-64.

Financial Services Authority. (2018). Indonesia Banking Statistics (Vol. 16, No. 9). Retrieved November 24, 2018, from https://www.ojk.go.id/id/kanal/perbankan/data-dan-statistik/statistik-perbankan-indonesia/Default.aspx

Fornell, C., & Larcker, D. F. (1981). Structural equation models with unobservable variables and measurement error: Algebra and statistics. Journal of Marketing research, 18(3), 382-388. doi: 10.2307/3150980

Ganotakis, P. (2012). Founder's human capital and the performance of UK new technology based firms. Small Business Economics, 39(2), 495-515.

Godquin, M. (2004). Microfinance repayment performance in Bangaladesh: How to improve the allocation of loans by MFIs. World Development, 32(11), 1909-2004. doi:10.1016/j.worlddev.2004.05.011

Hayes, A. F. (2009). Beyond Baron and Kenny: Statistical mediation analysis in the new millennium. Communication monographs, 76(4), 408-420. doi: 10.1080/036377509 033110360

Hayes, A. F. (2013). Introduction to Mediation, Moderation, and Conditional Process Analysis: A Regression-Based Approach. NY: Guilford.

Hu, L. t., & Bentler, P. M. (1999). Cutoff criteria for fit indexes in covariance structure analysis: Conventional criteria versus new alternatives. Structural Equation Modeling: A Multidisciplinary Journal, 6(1), 1-55. doi: 10.1080/10705519909540118

Hulland, J. (1999). Use of partial least squares (PLS) in strategic management research: A review of four recent studies. Strategic Management Journal, 20(2), 195-204.

Ibekwe, C. E. C. (2007). Determinants of loan repayment under the indigenous financial system in Southeast, Nigeria. The Social Sciences, 2(2), 116-120.

Inkpen, A., & Tsang, E. (2005). Social capital, network, and knowledge transfer. Academics of Managemnet Review, 30(1), 146-165.

Kakuru, J. (2008). The supply- demand factors interface and credit flow to small and micro enterprises (SMEs) in Uganda (Doctoral dissertation). Department of Management, University of Stirling, Stirling.

Ledgerwood, J. (1998). Microfinance handbook: An institutional and financial perspective. Washington, D.C: The World Bank.

MacCallum, R. C., Browne, M. W., & Sugawara, H. M. (1996). Power analysis and determination of sample size for covariance structure modeling. Psychological Methods, 1(2), 130-149.

Makorere, R. F. (2014). Factors affecting loan repayment behaviour in Tanzania: Empirical evidence from Dares Salaam and Morogoro regions. International Journal of Development and Sustainability, 3(3), 481-492.

Mamun, A., Wahab, A. S., Malarvizhi, C., & Mariapun, S. (2011). Examining the critical factors affecting the repayment of microcredit provided by Amanah Ikhtiar Malaysia. International Business Research, 4(2), 93-102.

Marr, A. (2002). Studying group dynamic: An alternative analytical framework for the study of microfinance impacts on poverty reduction. Journal of International Development, 14(4), 511-534. doi: 10.1002/jid.890

Mead, D. C., & Liedholm, C. (1998). The dynamics of micro and small enterprises in developing countries. World Development, 26(1), 61-74.

Mensah, S. (2004). A review of SME financing schemes in Ghana. Retrieved from https://semcapitalgh.com/downloads/research/SME_Financing_Schemes_in_Ghana.pdf

Ministry of Cooperative and SMEs Republic of Indonesia. (2018). Perkembangan Data Usaha Mikro, Kecil, Menegah (UMKM) Dan Usaha Besar (UB): Tahun 2012 – 2017. [Development Data for Micro, Small, Medium Enterprises and Big Enterprises: Years 2012 – 2017]. Retrieved November 24, 2018 from https://www.depkop.go.id/uploads/ laporan/1544033284_SANDINGAN_DATA_UMKM_2012-2017.pdf

Mosley, P., & Hulme, D. (1998). Microenterprise finance: Is there a conflict between growth and poverty alleviation? World Development, 26(5), 783-790. doi: 10.1016/S03057 50X(98)00021-7

Musyoki, D., & Kadubo, A. S. (2012). The impact of credit risk management on the financial performance of banks in Kenya for the period. International Journal of Business and Public Management, 2(2), 72-80.

Mutesasira, L. K., Osinde, S., & Mule, N. R. (2001). Potential for leasing products: Asset financing for micro-& small businesses in Tanzania and Uganda. Nairobi, Kenya: MicroSave-Africa. Retrieved from https://afraca.org/?wpfb_dl=18

Nahaphiet, J., & Ghosal, S. (1998). Social Capital, Intelectual Capital, and The Organizational Advantage. Academy of Management Review, 123(2), 242-266.

Nannyonga, H. L. (2010). Determinants of Repayment Behavior In The Centenary Rural Development Bank In Uganda. The Ohio State University.

Nawai, N. B., & Shariff, M. B. (2013). Determinants of repayment performance in microfinance programs in Malaysia. Labuan Bulletin of International Business & Finance, 11(2013), 14-29.

Nunnally, J. C. (1978). Psychometric methods. NY: McGraw-Hill.

Ojiako, I. A., Idowu, A., & Ogbukwa, C. (2014). Determinants of loan repayment behaviour of smallholder cooperative farmers in Yewa North Local Government area of Ogun State, Nigeria: An application of Tobit model. Journal of Economics and Sustainable Development, 5(16), 144-153.

Oke, J. T. O., Adeyemo, R., & Agbonlahor, M. U. (2007). An Empirical Analysis of Microcredit Repayment in Southwestern Nigeria. Humanity & Social Sciences Journal, 2(1), 63-74. doi: 10.1300/10911350802081592

Okpara, J. O., & Kabongo, J. D. (2009). An empirical evaluation of barriers hindering the growth of small and medium sized enterprises (SMEs) in a developing economy. African Journal of Business and Economic Research, 4(1), 7-21.

Onyeagocha, S., Chidebelu, S., Okorji, E., Ukoha, A., Osuji, M., & Korie, O. (2012). Determinants of loan repayment of microfinance institutions in southeast states of Nigeria. International Journal of Social Science and Humanities, 1(1), 4-9.

Papias, M. M., & Ganesan, P. (2009). Repayment Behavior in Credit and Saving Cooperative Societies (Empirical and Theoretical Evidence from Rural Rwanda). International Journal of Social Economics, 36(5), 608-625. doi: 10.1108/03068290910954059

Paxton, J. A. (1996). Determinants of successful group loan repayment: An application to Burkina Faso (Doctoral dissertation). Graduate School, The Ohio State University.

Podsakoff, P. M., MacKenzie, S. B., Jeong-Yeon, L., & Podsakoff, N. P. (2003). Common method biases in behavioral research: A critical review of the literature and recommended remedies. Journal of Applied Psychology, 88(5), 879–903.

Preacher, K. J., & Hayes, A. F. (2008). Asymptotic and resampling strategies for assessing and comparing indirect effects in multiple mediator models. Behavior Research Methods, 40(3), 879-891.

Rabbani, K., & Moossa, M. (2014). Non accessibility of bank financing to newly established SMEs. Pakistan Business Review, 16(2), 293-305.

Roslan, A., Faudziah, Z., Mohd Saifoul, Z. N., & Rahimah, M. (2007). Microfinance service for micro-enterprise: Good practices and performance of selected microfinance institutions in Malaysia. Journal of Yala Rajabhat University, 2(1), 31-45.

Roslan, A., & Karim, M. (2009). Determinants of microcredit repayment in Malaysia: The case of Agrobank. Humanity & Social Sciences Journal, 4(1), 45-52.

Safavian, M., Fleisig, H., & Steinbuks, J. (2006). Unlocking dead capital. Retrieved from https://siteresources.worldbank.org/INTTOPCONF3/Resources/307Safavian_Fleisig_Steinbuks.pdf

Sanrego, Y., & Antonio, M. (2013). The effect of social capital on loan reepayment behavior of the poor. Journal of Indonesian Economy and Business, 28(2), 209-231. https://doi.org/10.22146/jieb.6222

Siwale, J. N., & Ritchie, J. (2011). Disclosing the loan officer’s role in microfinance development. International Small Business Journal, 30(4), 432-450. doi: 10.1177%2F0266242610373687

Ssekiziyivu, B., Bananuka, J., Nabeta, I. N., & Tumwebaze, Z. (2018). Borrowers characteristics, credit terms and loan repayment performance among clients of microfinance institutions (MFIs): Evidence from rural Uganda. Journal of Economics and International Finance, 10(1), 1-10. doi: 10.5897/JEIF2017.0848

Tambunan, T. T. ( 2011). Development of small and medium enterprise in a developing country. Journal of Enterprising Comunities: People and Places in the Globa Elconomy, 5(1), 68-82. doi: 10.1108/17506201111119626

Tenenhaus, M., Vinzi, V. E., Chatelin, Y., & Lauro, C. (2005). PLS path modeling. Computational Statistics & Data Analysis, 48(1), 159-205. doi: 10.1016/j.csda.2004. 03.005

Villena, V., Revilla, E., & Choi, T. (2011). The dark side of buyer-supplier relationship: A social capital perspektive. Journal of Operations Management, 29(6), 561-576.
doi: 10.1016/j.jom.2010.09.001

Wenner, M. D. (1995). Group credit: A means to improve information transfer and loan repayment performance. The journal of development studies, 32(2), 263-281.
doi: 10.1080/00220389508422414

Yaron, Y. (1994). What makes rural financial markets successful? NY: World Bank. doi:10.1093/wbro/9.1.49

Zhang, Q., & Fung, H.-G. (2006). China's social capital and financial performance of private enterprises. Journal os Small Business and Enterprise Development, 13(2), 198-207.