Assessment of Credit Risk Management in Micro Finance Institutions: A Case of Adama Town Mfis, Ethiopia
Assessment of Credit Risk Management in Micro Finance Institutions: A Case of Adama Town Mfis, Ethiopia
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Abstract: This study is to assess the credit risk management of MFIs exist in Adama town,
Ethiopia.Sound credit risk management is a crucial for a financial institutions stability and continuing
profitability, while declining credit quality, the most frequent cause of poor financial performance
and condition. Micro finance provides financial support to the unbanked units of the society. Since
microfinance is a system that allocates small credits to poor persons in order for them to provide
income and start their own small businesses, it has the ability to lessen poverty as well as encourage
entrepreneurship, social and economic development for poor people.In any financial institution,
the biggest risks in microfinance is loaning money and not getting it back. The study adopted a
descriptive survey design. The population of study consisted of serviceprovision sectors in
Adamatown MFIs.The study utilized both quantitative and qualitative technic of data analysis. The
study involves that customer’sevaluation; credit risk control and collection principle had effect on
credit risk management of MFIs in Adama town credit and saving institutions. The study recommends
that MFIs should improve their collection policy by adapting a more stringent policy to a
lenient policy for effective debt recovery.
Keywords: credit risk management, Microfinance, Microfinance institutions, Microfinance policy
the production and the strategic structure of the • To identify the challenge that faced by MFIs
financial institutions (Basel, 2000; Rechard et al., in Adama town credit risk management.
2009, Tafri et al., 2011).
• To find out the strategies to manage credit
Credit management, or moreexactly credit risk risk in micro finance institutions.
management, refers to the arrangements,
Research Questions
procedures and controls, which a company has
in place to ensure the efficient collection of • What are credit risks management practices
customer payments thereby minimizing the risk that are most commonly faced by MFIs in
of non-payment (Mokogi, 2003). Adama town?
According toGreuning & Bratanovic, (2003).The • What are the challenges faced by MFIs to
real credit risk management (CRM) requires manage credit risk in Adama town?
building an suitable credit risk (CR) atmosphere; • What are the strategies used by MFIs in
working under a healthy credit lending process; Adama town to manage credit risks?
maintaining an appropriate credit administration
that need the controlling processand the sufficient Research Methedology
monitoring over loan risk. This research describe how the study has been
Nieman et al (2009) opinion that long term carried out, what the activities to be done in
consist financial performance is character to non- the research design.
financial factors like internal function, workers Research Design
satisfaction as well as brand and customer loyalty. Based on the statements of the problem and the
This opinion is shared by Ittner et al (1998) who objective of the study the researcher usedthat the
expires that the investment in intangible assets, descriptive type of research. The research
that is, customer satisfaction, is not approach used in the study is quantitative and
accommodated in the accounting data. qualitative data would be to address the
The same suggestion applies to the risk of an objectives. Therefore, the researcher utilizes
institution that is challenges to understand if survey research methods. Generally, Primary data
attention is alone directed at the financial systems. collected throughquestions and interview
distributed to respondents that consists Branch
Through the combination of non-financial
Managers and operation managers working on
evidence, the challenges associated with the
loan processing and also LoanOfficers.
manipulation of financial statements are reduced.
Secondary data was collected from different
By following a systematic approach and through
secondary sources.
taking into considered both financial and non-
financial information related to the institution, Method of Data Collection
anbetter understanding of MFI risks can be Primary data were gathered through both
achieved (CGAP, 2003). questionnaire and interview. The questionnaire
includesclose-ended questions, and distributed to
Aim and Objective of Study
respondents involving branch managers,
The many objectives of this study are to assess operation managers and credit officers working
of credit risk management in micro Finance on loan processing were targeted for the data
Institutions: in case of Adama town micro Finance collection where all the issues on the
Institutions. questionnaire were properly addressed.
Specific Objectives The close ended questions are used to test the
• To assess credit risk management practices rating of various features and this helped in
of Adama town MFIs. reducing the number of related responses in order
to get more varied responses.
Table 4.2: Number of loan clients per loan officer ratio of the respective MFIs
How many customers per loan Frequency Percentage
officer ratio does your
organization have?
< 500 customers 6 7.14
b/n 500 to 1000 Customers 58 69.05
b/n1000 to 2000 customers 18 21.43
>2000 customers 2 2.38
Total 84 100
Source: Output from Survey Data, 2019 participants indicated that their organization had
With concernsto decide the number of customers b/n 1000 to 2000 customers whereas 2.38% of
the organization had, from the findings 7.14 % the respondents indicated that their organization
of the respondents shown that their organization > 2000 customers this implies that one of the
had been less than 500 customers 69.05% of the reason for default loan is size of the customers
respondents indicated that their organization had so majority of the organizations featured in this
b/n500 to 1000 Customers 21.43% of the study had b/n 500 to 1000 customers.
Table 4.3: Extent to which Adama MFI use client appraisal in Credit risk Management
Source: Output from Survey Data, 2019 96.43% majority response agreement on
As seen from the table 4.4 items 1 to 5 character assessment of Customers as akey for
consideration. Item 4, confirmations that 85.71%
respondents were asked to show that their level
of agreement \disagreement on the significanceof therespondent’s agreed on considering physical
collateral while customers’ assessment as akey
of the practice listed as Scales: 5=Strongly Agree,
4=Agree, 3=Neutral, 2=Disagree and 1= Stronglyfor MFIs. Overall ,the respondentsdecided up on
Disagree. Accordingly, majority of the the key importance of considering the 5 Cs i.e.
respondents agreed on the significance of the capacity , character ,collateral ,condition and
items listed as far as clear assessment is competence of personnel while
concerned specifically speaking respondents customersassessment .
Challenges faced by MFIs in CRM
presented their agreements on failure to assess
customer repayment capacity result in default.In this section of the chapter challenges faced by
Likewise item 1 indicates that 98% of the MFIs in credit risk management issues such as
respondents agreed on the fact that Adama micro finance Institutions use credit risk
clientassessment as acredit risk management control in credit management were using tables
strategy.Still item 2, indicates that, 78.5% of the
and interpretations and analysis were done
respondents agreed on the importance of accordingly.Challenges consists reduce the
competent personnel as a key to carry out resource base for further lending, weaken staff
clients’assessment.Item 3, also shows that morale, and affect the borrower’s confidence.
Table 4.5: level to which Adama MFI use credit risk control in Credit Management
To what level does the MFI use credit risk control Frequency Percentage
in Credit Management?
Very great level 10 11.91
Great level 52 61.90
Moderate level 22 26.19
TATOL 84 100
Source: Output from Survey Data, 2019 Item 3, also indicates that 94 % of the respondents
From the above table , item 1 to 5 respondents agreed on predicable repayment periods improve
were asked to show their level of agreement loan repayment as a key for consideration in
\disagreement on the status of the practice listed credit risk control.
as strongly agree =5 , Agree=4,Neutral=3, Finally, Item 4, Punishment for late
Disagree =2 and Strongly Disagree =1. Therefore, paymentsenhances customer’s commitment to
overall then majority of the respondents agreed loan repayment. Item 5,customers’ credit
on the usefulness of the items listed as far as credit application forms increasesmonitoring and credit
risk control is concerned. The respondents management. Item 6 Credit teams involvement
indicatetheir agreements on the procedure to use in making decisions and Item 7 Interest rates
credit risk control in Credit risk Management. charged on performance of loans indicates that
likewise Item 1 and 2, shows that 95 % of the the respondents greatly agreed on considering
respondents agreed on the fact that Imposing loan credit risk control as a key factor for MFIs.
size limits is a viable strategy in credit risk Generally, the generalrespondents agreed up on
management and the importance of credit checks the key importance of considering Credit risk
on regular basisimproves credit risk management Management is risk control methods.
as a key to Cary out credit risk control.
Table 4.6: Extent to which MFI use collection policy in Credit risk Management
Source: Output from Survey Data, 2019 the respondents shown to a very great level
The study shown to conclude the extent to whereas 4.76 % of the respondents shown to
which MFI use collection policy in Credit amoderate extent, this implies that MFI use
risk Management, from the findings 61.91% of Strategies to manage credit risk management
the respondents shown to a great level, 33.33%of through collection policy in Credit risk
Management.
Table 4.7: Level of agreement on collection policy of MFI
Items Strongly Agree Neutral Disagree Strongly
agree % % % disagree
1. Accessible collection policies have 42.86 57.14 0 0 0
assisted towards effective credit
risk management.
2. Preparation of policies has been a 50 44.05 2.38 3.57 0
challenge in credit risk management.
3. Implementation of guarantee policies 55.95 44.05 0 0 0
provides chances for credit recovery
in case of loan defaults
4. Staff encouragements are effective 46.43 51.19 0 2.38 0
in improving recovery of criminal loans.
5. Regular evaluationshave been done on 46.43 53.57 0 0 0
collection policies to increase state
of credit risk management.
6. A strict policy is more effective 50 48.81 0 1.19 0
in debt recovery than a lenient policy
Source: Output from Survey Data, 2019 importance of the practice listed as strongly
The study indicates to found the level at agree =5, Agree=4, Neutral=3, Disagree =2 and
which respondents settled or disagreed on the Strongly Disagree =1. with the above items