Does Borrower’s Personality Affects the Repayment of the Loan? A Study of Banking Sector of Pakistan
Abstract
The continuing global increase in economic activities is increasing the importance of the banking sector as the hub of such activities. The banking sector issue loans to individuals, firms, and government. Various factors influence the repayment of these loans. In this study, we argue that the personality of the borrower affects the repayment of the loan. We have selected a sample of 500 borrowers of five major banks in Pakistan by using a cluster sampling technique. We selected 250 (50%) regular borrower and 250 (50%) defaulters. We measured borrower personality through a 44-items big five inventory (BFI) questionnaire similar to John & Srivastava (1999). We analyzed data using one-way ANOVA and regression. The results show considerable significant differences between the personality of regular borrowers and defaulters on all five traits of personality, which reveals that the borrower’s personality affects the repayment of the loan. The defaulters were high on extroversion and neuroticism dimensions, while regular borrowers were high on agreeableness, conscientiousness, and openness to experience. The results also depict the strong effect of demographic characteristics such as income, education, and family size on loan repayment. The study suggests banks consider the personality traits of the borrower at the time of issuing of loan.
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