Abstract
The purpose of the study was to assess the perceived effectiveness of credit risk management strategies (CRMS) adopted by microfinance institutions (MFIs) in the Sekondi-Takoradi Metropolis (STM), Ghana. Descriptive survey design was adopted for the study. The population was 261. The sample size for the study was 158 key staff of the various MFIs selected purposively. These key staff were credit officers, finance staff, and managers of the various MFIs. Questionnaire with a reliability coefficient of 0.87 was the instrument used to collect the data. Descriptive statistical tools such as means and standard deviations were used to analyse the data. The findings show that there are meaningful and appropriate credit policies and procedures used by MFIs in STM. However, the effectiveness of CRMS adopted by MFIs in STM is not quite good. Also, credit control processes adopted by the MFIs are not quite adequate as expected. It was recommended that administrators of MFIs in the metropolis should enhance their respective institution’s credit policies and procedures, especially the appraisal of client process. This will create room for the institutions to have credit policies and procedures that allow the institution to identify and analyse all loss exposures, and measure such loss exposures appropriately. Keywords: Credit control process, Credit policies, Credit procedures, Credit risk management DOI: 10.7176/RJFA/11-6-15 Publication date: March 31 st 2020
Highlights
Credit risk can be seen as the potential that a borrower or counterpart will fail to meet its obligations in accordance with agrees terms (Kibui & Moronge, 2014)
The study: 1. examines the credit policies and procedures used by Microfinance institutions (MFIs) in Sekondi-Takoradi Metropolis (STM); 2. assesses the perceived effectiveness of credit risk management strategies (CRMS) adopted by MFIs in STM; 3. examines the credit control process adopted by MFIs in STM
The results show that in relation to credit control process adopted by MFIs in STM, signing of the credits and collateral agreement (Mean = 3.60, SD = 0.98), giving creditors reminder letters (Mean = 3.27, SD = 0.83), compliance with internal guidelines (Mean = 2.97, SD = 0.92), establishing payment guidelines (Mean = 2.92, SD = 0.85), and developing an account receivable section (Mean = 2.64, SD = 0.98) are some of the processes adopted by the institutions
Summary
Credit risk can be seen as the potential that a borrower or counterpart will fail to meet its obligations in accordance with agrees terms (Kibui & Moronge, 2014). It involves inability or unwillingness of a customer or counterparty to meet commitments in relation to lending, trading, hedging, settlement and other financial transactions. Microfinance institutions (MFIs) ability to compete, survive and perform better depends mostly on their capability to manage credit risk appropriately. According to Gerhard (2015), the effective management of credit risk is a critical component of a comprehensive approach to risk management and essential to the long-term success of any Microfinance Institution (MFI)
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