A critical evaluation of credit risk management and loan performance in microfinance institutions: A case of a leading microfinance company, Lusaka, Zambia
Ngwira Lungu, Dr. William Phiri
The purpose of the study was to conduct a critical evaluation on how credit risk management practices impacts on loan performance in selected microfinance companies of Lusaka district, Zambia. The study used client appraisal, credit terms and collection policy as the dimensions of the credit risk management practices. A case study research design was employed in order to obtain a deeper insight on the subject under investigation. The target population included Management and clients from one of the leading microfinance company which was studied in detail as a case study. Questionnaires, structured interviews and observations were used to collect both qualitative and quantitative data. Qualitative data was analysed using themes derived from the research objectives and quantitative data was analysed using SPSS. The findings of the study revealed that client appraisal showed a strong correlation (r = 0.896) impact on the performance of the loans. It was further revealed that the company’s implementation of the 5C’s model (Character, collateral, capacity, capital and condition) was done in isolation. The study furthermore unearthed that there was no link among the 5Cs in the appraisal process at the organisation under investigation. The study findings also indicated that the credit terms such as high interest rate which the company was charging lead to loan default. It also came to light that the charges of other fees on loans reduced the loan amount which the client got; that lead to diversion of funds to unintended purposes. The study furthermore revealed that, the company’s failure to stringently follow the recovery process caused clients to default on their loan repayment obligation. Based on research findings, the following recommendations emerged: 1.Management of Entrepreneurs Financial Centre should ensure that implementation of the appraisal process model strictly follow the 5Cs (character, collateral, capacity, condition and capital) model without compromising on any element. 2. Management of the entity should prioritize the training of staff doing the appraisal process. 3. The management and board of the company should explain interest rate charged on the loans to clients and they should ensure that borrower’s accept to pay both the interest and principle. 4. Management of the entity under review should reduce the interest rates by reducing other loan cost.5 The board through management of the company should make sure that the collection process is implemented stringently.