Impact of Economic and Non-Economic Factors Affecting Loans in Sri Lanka

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Academically

As undergraduates we should have a sound knowledge in micro & macro economical variables and the importance of the financial sector of Sri Lanka. This study attempts to investigate the economic variables which affect the financial sector & also the non-economic variables with the practical experiences gained through the industrial training, therefore to use both our theoretical and practical knowledge is a great advantage. In other words this research study helps to get a practical exposure on theoretical aspects that we have studied in the University.

The Society

Refinance and IFA Loans are special products of a bank because the interest rate of these loans are very low compared to other loan schemes and therefore these IFA and Refinance loans are mainly given to new development projects, grass-root borrowers for start-up projects etc. in other words these loans are used for development purposes of the society rather than just consumption. These loans help to generate income sources, employment sources etc. which is very important for the Society as a whole.

1.6 Scope of the Study

The scope of the study mainly depends on economic variables such as interest rates, exchange rates, inflation, business cycle, GDP, economic policies, international affairs etc. and non economic factors related to customers, lending officers, government regulations etc.

1.7 Limitations of the Study

This study is limited to the activities of one bank; this is consequent to the time constraint on the duration of this study, so that the study can fully investigate the problem area. Therefore, I have focused solely on Sampath Bank, as the case study for the study. No other comparison has been made with other banks in the same area. The results of this study cannot be generalized to other banks because this is a single case study carried out on one of the banks specific issue.

Following are some other limitations of the study;

- Availability of actual data and information due to confidentiality.

- Sample size may not be adequate.

- Availability of number of loan schemes with different interest rates and conditions.

- Data analyzing techniques may depend on past data and information.

- Difficulty of measuring regulatory environment and government economic strategies, policies on credit activities.

2. Literature Review

From literature review I hope to deal with economic factors such as interest rates, exchange rates, inflation, macroeconomic policies of the government and non economic factors such as loan characteristics, borrowers’ characteristics, weather conditions (rainfall patterns due to majority of the refinance loans are distributed for mini hydro power projects) affecting repayment delays in Refinance and IFA Loans.

3. Conceptual Framework and the Research Methodology

3.1 Conceptual Framework

Conceptualization refers the pattern of the relationship between the key variables of the concepts. This is very important to understand the research problem. It can be depicted in the following pictorial model.

[pic 1]

3.2 Hypothesis of the Study

The following hypotheses can be developed based on the available information including the literature of review.

- Hypothesis one

Interest rate is a major economical factor which affects for repayment delays of Refinance and IFA loans.

- Hypothesis two

Inflation is a major economical factor which affects for repayment delays of Refinance and IFA loans.

- Hypothesis three

Exchange rate is a major economical factor which affects for repayment delays of Refinance and IFA loans.

- Hypothesis four

Macroeconomic policy related to credit of the government is a major economical factor which affects for repayment delays of Refinance and IFA loans?

- Hypothesis five

Loan characteristics are major non economical factor which affect for repayment delays of Refinance and IFA loans.

- Hypothesis six

Weather condition is a major economical factor which affects for repayment delays of Refinance and IFA loans.

- Hypothesis seven

Borrower characteristics are major non economical factor which affect for repayment delays of Refinance and IFA loans.

- Hypothesis eight

Characteristics of Credit officers are major non economical factor which affects for repayment delays of Refinance and IFA loans.

4. Study Design

4.1 Approaches to the Research and Data Gathering

In this study I hope to use quantitative research approach since I have planned to use lot of secondary data (statistics) other than primary data. This involves an objective way of studying things. Quantitative approach, also referred to as positivist, is scientific in approach

The primary data will be collected through a questionnaire and the secondary data will be collected from published text books, journals, articles published and study reports available in the internet.

4.2 Population and Sampling

According to the study, the population of this research includes all the customers of Development Banking Unit and customers who have obtained Refinance and IFA loans from branch level, which have repayment delays over 90 days.

The study will be based on a sample of 50 customers including customers of DBU and branches covering all the provinces of Sri Lanka. Data will be obtain branch level to H/Q level by distributing questionnaire among the staff carder