Evaluating the credit risk management practices of microfinance institutions in Ghana: Evidence from Capital Line Investment Ltd. and Dream Finance Ltd

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.