Credit Risk Management and the Financial Performance of Microfinance Institutions in Southern Africa

Abstract

The Microfinance Institutions (MFIs) in Southern Africa have been condemned as being unprofitable, and unsustainable. These MFIs also suffer due to unhealthy loan portfolios. Motivated by these challenges, this study empirically investigates the relationship between credit risk management and the financial performance of MFIs in Southern Africa. The study uses panel data set for the period 2012-2018 which were extracted from the Microfinance Information Exchange (MIX) online database from a sample of 44 MFIs. The data were analysed using descriptive statistics and regression analysis. A panel data regression model which used lagged financial performance (profitability), productivity and microfinance size as control variables was developed to test the relationship between financial performance (the dependent variable) and credit risk management (the independent variable).The specified model was estimated using a dynamic panel data model, the Generalized Methods of Moment (GMM) estimation technique. The study established that there was a relatively high level of profit persistence in the MFI industry in Southern Africa. The relationship between lagged profitability and financial performance was significant for Return on assets (ROA) and Return on equity (ROE). In addition, the study also found that credit risk management had a significant negative impact on the financial performance of MFIs as measured by both ROA and ROE. Furthermore, the study proved that operational efficiency had a significant negative impact on ROA whereas the personnel productivity ratio had a positive impact on ROA. Surprisingly, the study established that the log of total assets was inversely related to the financial performance of microfinance institutions. Their effects were, however, insignificant in the two estimated regression equations. The study recommends that MFIs put in place policies that help to increase competition in the microfinance industry to improve efficiency and profitability. In addition, the study recommends that management in MFIs should develop policies, procedures, and guidelines to improve the efficiency of risk management. Microfinance institutions should also train their staff to improve efficiency and productivity.