Credit Risk Analysis and Microfinance Loan Quality in Rwanda: A Case Study of Cooperative COPEDU Ltd

Abstract

The key objective of Microfinance Institutions (MFIs), like any other business organization is to maximize profits. However, the increased rates of non-performing loans (NPLs) hinder microfinance institutions from achieving their main objective. This study aimed to examine the effect of credit risk analysis on the quality loan portfolio of Microfinance Institutions in Rwanda. The credit risk analysis was measured using collection policy, loan policy and client credit appraisal. On the other hand, the loan quality portfolio was measured by Non-performing Assets (NPAs). A descriptive research design was used to describe the relationship between the study variables. A total of 30 respondents consisting of managers and credit officers were purposively selected. Data was collected from primary and secondary sources using questionnaires and financial reports. Data was analyzed by using both descriptive and inferential statistics. The results from the survey indicated that all aspects of credit risk management have got an effect on the quality loan portfolio, as evidenced by an R-square of 34.8% and a P-value of 0.01. Findings further revealed that poorly formulated Credit policy and lack of monitoring of loans through inadequate loan appraisal and loan collection procedures were identified as the main causes of Non-Performing Loans (NPLs), at 43.3%; 66.7%; 53.3%, respectively, further evidenced by the P-values of 0.01,0.012 and 0.000. The researchers further found that management decisions, conditions, and procedures have the greatest effect on non-performing loans at M=4.30; SD .887; and M=4.23; SD= .679, respectively. To address the danger of non-performing loans in the MFIs, the following measures were recommended to the management of COPEDU LTD. Effective monitoring of loans, credit training programs, tight security requirements and seeking the services of credit reference bureau and committed debt collectors.