Credit risk management practices in small and medium-sized micro-finance providers

Abstract

Microfinance providers play a significant role in emerging economies by providing banking-related financial services to the low income market. However, lending to the low income market is associated with high credit risk. This paper investigates the use of certain risk management practices by small and medium-sized micro finance providers in the Cape Metropolitan Area. The big difference of micro-finance is that collaterals are absent and instead, a close connection between microfinance providers and their clients come into place. And while micro-finance providers use follow up calls and penalties to avoid losses from loan overdue, the classical way to the court is not really an option. Instead, community leaders function as middlemen between the provider and the customer. Although most respondents agree that policies are in place, written risk policies exist in only half of our respondent’s enterprises. We further showed that the views on risk management depend on whether the respondent is an owner or a manager of the venture.