Journal of Economics and Financial Analysis, 3 (1), pp. 27-45, [2019]
URI: https://ojs.tripaledu.com/jefa/article/view/42/46

Implication of Credit Supervision Practices on Portfolio at risk of Microfinance Institutions in Tanzania


St. Johns University of Tanzania, Tanzania, United Republic of


Mzumbe University, Tanzania, United Republic of


DOI: http://dx.doi.org/10.1991/jefa.v3i1.a22

Abstract

This study seeks to establish the implication of credit supervision practices on portfolio management of microfinance institutions in Tanzania. Utilizing multivariate regression technique over sampled 219 microfinance institutions from Dar es Salaam, Morogoro and Dodoma regions, it documents two plausible results. First, the study finds that timely loan release and number of borrowers per loan officer have positive and statistically significant impact on portfolio at risk of microfinance institutions. Second, it reveals that operation cost per borrower and provision of training sessions to borrowers have negative and statistically significant impact on portfolio at risk of microfinance institutions.
These results suggest that microfinance institutions can diminish portfolio risks by (1) decreasing number of days for processing clients’ loan applications and releasing funds; (2) decreasing number of clients per each loan officer in order to increase efficiency of loan management of the officers; (3) increasing training sessions on various skills given to their borrowers which will increase knowledge and skills of clients on the best ways to keep their business records and proper utilization of funds, and so successful repayments; (4) allocating enough budgets for overall supervisory purposes including loan appraisal processes, disbursement procedures and collection of funds from their clients.

Keywords

Credit Supervision; Portfolio at Risk; Microfinance Institutions; Credit Risk

JEL Classification

D23, G21, G23

Full Text:

PDF
HTML

References

Abreham, G. (2002). Loan repayment and its Determinants in Small-Scale Enterprises Financing in Ethiopia: Case of Private Borrowers around Zeway Area, MSc. Thesis, Addis Ababa University.

Ameyaw-Amankwah, I. (2011). Causes and Effects of Loan Defaults on the Profitability of Okomfo Anokye Rural Bank. Masters Thesis, Kwame Nkrumah University of Science and Technology.

Anduanbessa, T. (2009). Statistical Analysis of the Performance of Microfinance Institutions: The Ethiopian Case. Savings and Development, 33(2), pp. 183-198.

Akerlof, G. (1970). The Market for "Lemons": Quality Uncertainty and the Market Mechanism. The Quarterly Journal of Economics, 84(3), pp. 488-500. DOI: 10.2307/1879431

Bichanga, W.O., and Aseyo, L. (2012). Causes of loan Default within Micro Finance Institutions in Kenya. International Journal of Contemporary Research in Business, 4(12), pp. 316-335.

Biosca, O., Lenton, P., and Mosley, P. (2011). Microfinance Non-Financial Services: A Key for Poverty Alleviation? Lessons from Mexico. University of Sheffield, UK.

Bofondi, M., and Gobbi, G. (2003). Bad Loans and Entry in Local Credit Markets. Oxford University Press, New York.

Coase, R. (1960). The Problem of Social Cost. Journal of Law and Economics, 3, pp. 1-44.

Colquitt, J. (2007). Credit Risk Management: How to Avoid Lending Disasters and Maximize Earnings. Third Edition, McGraw-Hill, New York.

Ciborra, C. (2006). Imbrication of Representation: Risk and Digital Technologies. Journal of Management Studies, 43(6), pp. 1339-1356.

Crabb, P.R., and Keller, T. (2006). A Test of Portfolio Risk in Microfinance Institutions. Faith and Economics, 47(48), pp. 25-29.

Dahir, M.A.M. (2006). The Challenges Facing Microfinance Institutions in Poverty Eradication: A Case Study in Mogadishu. International Journal of Humanities Social Sciences and Education, 2(2), pp. 56-62.

Edgcomb, E., and Barton, L. (1998). Social Intermediation and Microfinance Programs: A literature review. Bethesda: Microenterprise Best Practices. USAID, Washington.

Fernando, N.A. (2008). Managing Microfinance Risks: Some Observations and Suggestions. Asian Development Bank, Mandaluyong City, Metro Manila, Philippines.

Field, E., and Pande, R. (2008). Repayment Frequency and Default in Microfinance: Evidence from India. Journal of European Economic Association, 6(2/3), pp. 501-509.

Firafis, H. (2015). Determinants of Loan Repayment Performance: Case Study of Harari Microfinance Institutions. Journal of Agricultural Extension and Rural Development, 7(2), pp. 56-64.

Fight, A. (2004). Credit Risk Management. Elsevier: Butterworth-Heinemann, UK.

George, O.N. (2015). Credit Appraisal Process and Repayment of Loan at GN Bank: A Case Study of Upper and Lower Denkyira. Master Thesis. The School of Business, Kwame Nkrumah University, Ghana.

Gyamfi, M., and Boateng, S. (2013). Credit Risk and Loan Default among Ghanaian Banks: An Exploratory Study. Management Science Letters, 3(3), pp. 753-762.

Hair, J.F., Black, W.C., Babib, B.J., and Anderson, R.E. (2010). Multivariate Data Analysis. 7th edition, Pearson Prentice Hall, New York.

Ho, R. (2006). Handbook of Univariate and Multivariate Data Analysis and Interpretation with SPSS.Chapman & Hall/CRC, USA.

Hooman, M. (2009). Factors Affecting Loan Repayment Rerformance of Farmers in Khorasan-Razavi province of Iran. University of Humberg, Iran.

Ibtissem, B., and Bouri, A. (2013). Credit Risk Management in Microfinance: The Conceptual Framework. ACRN Journal of Finance and Risk Perspectives, 2(1), pp. 9-24.

Johnson, S., and Rogaley, B. (1997). Micro Finance and Poverty Reduction. OXFAM: UK and Ireland.

Kariuki, J.N. (2010). Effective Collection Policy. Nairobi: KASNEB Publishers.

Kashuliza, A. (1993). Loan Repayment and its Determinants in Smallholder Agriculture: A Case Study in the Southern Highlands of Tanzania. East Africa Review, 9(1), pp. 219-228.

Keenan, A, and Stevens, P.J. (2016). Applied Multivariate Statistics for Social Sciences, Analysis with SAS and IBM’S SPSS. Six Edition, Routledge Taylor & Francis Group, New York.

Kiliswa, N.G., and Bayat, M.S. (2014). Determinants of Loan Repayment in Small Scale Enterprises in Developing Countries. Management Studies and Economic Systems, 1(2), pp. 67-79.

Kimando, L., Kohoro, J.M., and Njogu, G.W. (2012). Factors Influencing the Sustainability of Micro- Finance Institutions in Murang’a Municipality. International Journal of Business and Commerce, 1(10), pp. 21-45.

Kinde, B.A. (2012). Financial Sustainability of Microfinance Institutions (MFIs) in Ethiopia. European Journal of Business and Management, 4(15), pp. 1-11.

Korankye, A.A. (2014). Causes and Control of Loan Default/Delinquency in Microfinance Institutions in Ghana. American International Journal of Contemporary Research, 4(12), pp. 36-45.

Lagat, F.K., Mugo, R., and Otuya, R. (2013). Effect of Credit Risk Management Practices on Lending Portfolio among Savings and Credit Cooperatives in Kenya. International journal of Science Commerce and Humanities, 1(5), pp. 93-106.

Ledgerwood, J. (2000). Sustainable Banking with the Poor, Microfinance Handbook: An Institutional and Financial Perspective. The World Bank, Washington. D.C

Magali, J.J. (2013). The Influence of Rural Savings and Credits Cooperatives Societies (SACCOS’) Variables on Loans Default Risks: The Case Study of Tanzania. Research Journal of Finance and Accounting, 4(19), pp. 77-92.

Moti, H.O., Masinde, J.S., Mugenda, N.G., and Sindani, M.N. (2012). Effectiveness of Credit Management System on Loan Performance: Empirical Evidence from Micro Finance Sector in Kenya. International Journal of Business, Humanities and Technology, 2(6), pp. 99-108.

Mwangi, N. (2016). The Effect of Interest Rates on Microfinance Institutions’ Products in Kenya: A Case Study of Kenya Women’s Finance Trust in Nairobi County. Chandaria School of Business, United States International University Africa.

Nawai, N., and Shariff, M.M. (2012). Factors Affecting Repayment Performance in Microfinance Programs in Malaysia. Procedia - Social and Behavioral Sciences, 62(24), pp. 806-811.

Nguta, M.H., and Huka, G.S. (2013). Factors Influencing Loan Repayment Default in Micro-Finance Institutions: The Experience of Imenti North District, Kenya. International Journal of Applied Science and Technology, 3(3), pp. 80-84.

Nyamsogoro, G.D. (2010). Financial Sustainability of Rural Microfinance Institutions (MFIs) in Tanzania. PhD Thesis, University of Greenwich, United Kingdom.

Onyeagocha, S.U.O., Chidebelu, S.A.D., Okorji, E.C., Osuji, M.N., and Korie, O.C. (2012). Determinants of Loan Repayment of Microfinance Institutions in Southeast States of Nigeria. International Journal of Social Science and Humanities, 1(1), pp. 4-9.

Pasha, S.A.M. and Negese, T. (2014). Performance of Loan Repayment Determinants in Ethiopian Micro Finance – An Analysis. Eurasian Journal of Business and Economics, 7(13), pp. 29-49.

Polio, G., and Obuobie, J. (2010). Microfinance Default Rates in Ghana: Evidence from Individual Liability Credit Contracts. The MicroBanking Bulletin, Issue 20.

Rahman, M., and Mazlan, A. (2014). Determinants of Financial Sustainability of Microfinance Institutions in Bangladesh. International Journal of Economics and Finance, 6(9), pp. 107-116.

Richard, E., Chijoriga, M., and Kaijage, E. (2008). Credit Risk Management System of a Commercial Bank in Tanzania. International Journal of Emerging Markets, 3(3), pp. 323-332.

Roslan, A.H., and Karim, M.Z.A. (2009). Determinants of Microcredit Repayment in Malaysia: The Case of Agrobank. Humanities Social Sciences Journal, 4(1), 45-52.

Setargie, S. (2013). Credit Default Risk and its Determinants of Microfinance Industry in Ethiopia. Ethiopian Journal of Business and Economics, 3(1), pp. 1-21.

Simone, V. (2011). Liquidity Risk, Credit Risk, Market Risk and Bank Capital. International Journal of Managerial Finance, 7(2), pp. 134-152.

Navajas, S., Schreiner, M., Meyer, R.L., Gonzalez-Vega, C., and Rodriguez-Meza, J. (2000). Microcredit and the Poorest of the Poor: Theory and Evidence from Bolivia. World Development, 28(3), pp. 333-346.

Tehulu, T.A. (2013). Determinants of Financial Sustainability of Microfinance Institutions in East Africa. European Journal of Business and Management, 5(17), pp. 152-158.

Warue, B.N. (2012). Factors Affecting Loan Delinquency in Microfinance in Kenya. International Journal of Management Sciences and Business Research, 1(12), pp. 27-48.

Wongnaa, C.A., and Victor-Awunyo, D. (2013). Factors Affecting Loan Repayment Performance among Yam Farmers in the Sene District, Ghana. Agris Online Papers in Economics and Informatics, 5(2), pp. 111-122.

Zohair, M. (2013). Factors Affecting Repayment of Loans by Micro-borrowers in Tunisia: An Empirical Study. Journal of Management and Public Policy,4(2), pp. 4-16.




Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License.