In recent decades, microfinance – small-scale financial services to low-income households – has given the promise of improving the lives of hundreds of millions of people across the world. The literature on microfinance identifies outreach, impact, and sustainability as the three goals of microfinance institutions. This thesis focuses on repayment performance – an important subject that has received little critical attention in the literature on microfinance. Repayment performance is important because it is a necessary, though not sufficient, condition of sustainability. Repayment performance is also an important indicator of the performance of microfinance institutions, although other measures such as profitability, financial management, and efficiency also measure performance. Repayment performance also deserves attention because high repayment rates have often presented by microfinance institutions as evidence of their success.

This study examines the repayment performance of nine village banks (informal financial institutions of 25-30 women) in Nepal and finds results that both corroborate and contradict results previously found on repayment performance of microfinance institutions. It corroborates previous results in that village banks have had no defaults – irrecoverable loans – in their roughly three-year life-span. Microfinance institutions generally present default rates as the measure of repayment performance. However, using default rates to represent repayment performance is misleading since it can mask delinquencies – delayed payments – which are much more frequent than default rates.

Distinguishing between defaults and delinquencies is crucial. All defaults begin as delinquencies, but since defaults are much more infrequent than delinquencies, delinquencies are generally not reported by microfinance institutions. Delinquencies, however, can endanger microfinance institutions by slowing the rotation of portfolio, causing them to lose credibility and discipline, and threatening long-term institutional viability.

Among the nine village banks in this study, less than a third of the loans of village banks with weekly repayment schedules and less than half of the loans of village banks with lump-sum repayment schedules were found to have timely repayment records. The rest of the loans had either missed payments, incomplete payments, or were rescheduled. Surprisingly, this study found that village banks tolerate delinquencies and do not see them as threats. We can understand this puzzling finding if we realize that village banks serve as much of a social purpose as they do of a financial purpose. Members of village banks are confident that none of the loans that they give out will be irrecoverable because of the close interactions that they have with other members. They feel that delaying payments on loans is acceptable as long as the loans are eventually repaid. However, village banks seem to be generally unaware of the pressures delinquencies can put on the institutional viability of the institution in the long run; therefore, this study concludes by saying that more attention should be given towards reducing delinquencies.