Abstract:
Several factors are constraining the continuous growth of the microfinance
sector in Ghana among which are high risk of defaulting loans and how to
ensure effective management of credit risk so as to simultaneously maximize
returns on assets and minimize defaulting loans. Using a survey approach and
convenience non–probability sampling technique, we applied the Risk
Management Feed-back Loop concept proposed by GTZ (2000) to evaluate the
credit risk management policies employed by microfinance firms in their quest
to manage credit risks in order to minimize defaulting loans. The results of the
descriptive analysis indicate that credit risk is the most significant risk that
poses a great threat to the overall survival of microfinance firms. The study
also revealed that ineffective client information verification system increases
the rate of bad loads in microfinance companies. Based on our findings, we
recommend that in order to ensure improvement in the performance of
microfinance institutions, measures that seek to reduce credit risks should be
strengthened. More so, in order to reduce the level of bad debts in the loan
portfolios of microfinance firms, we recommend that the system for verifying
client information before loan disbursements should be strengthened.
Specifically, a detailed scrutiny of the client should be made before making loan disbursements.
