The Assessing Credit Risk Management Practice of MFIs: Evidence from Micro Finance Institutions in Sidama Regional State, Ethiopia

Abstract

Sound credit risk management practices in the MFIs industry enables to control an institution's exposure to losses and protect the value of its assets by improving the loan collection. So, the objective of this study was to identify effect of credit risk management practice on loan collection of MFIs in Sidama regional state, Ethiopia. To this end, the researcher employed quantitative approach with explanatory research design where the effect caused by the independent variables on the dependent variable is observed through regression analysis. The purposive sampling techniques has been employed by researcher in order to select 115 sample size from five MFIs in the study area. The primary data was collected using structured questionnaire. Then, both descriptive and inferential statistics analyses have been done through SPSS version 21.0 in order to get the reliable research findings. Accordingly, the result of multiple liner regression showed that five variables such as use of collateral, credit risk identification, credit monitoring, credit policy and credit analysis have positive and statistically significant effect loan collection. Based on the findings of the study, the researcher forwarded possible recommendations for the MFIs in the study area to work on statistically significant variables due to fact that they have significant influence in improving loan collection. For instance, increase on the use of collateral increase in loan collection. This implies that more the institutions ask for collateral before lending money for borrowers contributes to the effectiveness loan collection practice. So, that it is recommended to Sidama Chalala should work on collateral to improve loan collection that enables to advance the capacity of MFIs to deliver different financial services to the lower income people.

Keywords: Credit Risk Management Practice, Loan Collection, Micro Finance Institutions, Sidama Regional State, Ethiopia

DOI: 10.7176/EJBM/12-19-03

Publication date:July 31^st 2020