AN ASSESSMENT OF THE CAUSES OF LOAN DEFAULT AMONG SMALL AND MEDIUM ENTERPRISES (SMES) IN LILONGWE: A CASE STUDY OF TSOKA MARKET, AREA 3, AND THE NATIONAL ECONOMIC EMPOWERMENT FUND (NEEF).

This study examined the causes of loan default among Small and Medium Enterprises (SMEs), focusing on a case study of Tsoka Area 3 Market and the National Economic Empowerment Fund (NEEF) in Lilongwe. SMEs play a critical role in employment creation, poverty reduction, and overall economic growth in Malawi. Despite their importance, many SMEs struggle to repay loans obtained from microfinance institutions and government lending programs, leading to high default rates that threaten the sustainability of such financial support initiatives. The study therefore sought to identify the major factors contributing to loan default among SMEs operating within the selected area.

A quantitative research approach was employed to systematically analyze the determinants of loan default. Data were collected through structured questionnaires administered to 48 respondents, comprising SME owners and NEEF officials. The data were analyzed using descriptive statistical methods to determine the most significant economic, financial, and managerial factors influencing loan repayment performance.

The findings revealed that several interrelated economic challenges significantly constrained SMEs’ ability to repay loans. High interest rates increased the cost of borrowing, while inflation reduced purchasing power and raised operational costs. Market volatility, intense competition, and low sales volumes further weakened business profitability. Additionally, short repayment periods placed pressure on business cash flows, limiting the ability of entrepreneurs to generate sufficient revenue before repayment deadlines.

Financial and managerial factors also played a substantial role in loan default. Many SME owners demonstrated poor financial management practices, including inadequate record-keeping, lack of budgeting, weak cash-flow management, and the mixing of personal and business finances. These practices reduced financial transparency and impaired proper planning for loan repayment. Furthermore, loan diversion—where borrowed funds were used for unintended purposes due to emergencies or household needs—was identified as a major contributor to default. Limited monitoring and follow-up by lenders further exacerbated the problem.

The study concludes that reducing loan default among SMEs requires a multi-faceted approach. Strengthening financial management skills through training programs, reviewing loan conditions such as interest rates and repayment periods, and enhancing lender monitoring and support mechanisms are essential strategies for improving loan repayment performance and promoting sustainable SME growth.