Loan Default Rate and its Impact on Profitability in Financial Institutions

Abstract

Purpose: The purpose of this paper was to identifying the loan default rate and its impact on profitability, and determining ways of reducing loan defaults in microfinance institutions.

Design/methodology/approach: The study adopted both qualitative (case study) and quantitative methods respectively. Financial institutions were selected to gather data, which was acquired from answers obtained from our administered questionnaire and also through interviews. The population of the survey constituted the management and non-management staff and customers of First Allied savings and loans limited, Eden Microfinance and Opportunity International savings and loans Limited.

Findings: Hypotheses of the study will be analyzed using correlation and regression. Results of the study show that there are high positive correlation between the constructs of loan default rate and profitability of the various microfinance institutions.

Keywords: Loan default rate, profitability, microfinance institutions