Credit Risk in Microfinance Institutions: Empirical Evidence from Accra Metropolis of Ghana

Journal of Economics and Business

ISSN 2615-3726 (Online)

ISSN 2621-5667 (Print)

Published: 19 August 2018

Credit Risk in Microfinance Institutions: Empirical Evidence from Accra Metropolis of Ghana

Nicholas Oppong-Mensah, Edward Yeboah, Benjamin Korley Amartey

University of Energy and Natural Resources (Ghana), Kwame Nkrumah University of Science and Technology (Ghana)

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10.31014/aior.1992.01.03.23

Abstract

This study investigates the credit risk in the Microfinance Industry in Ghana using Microfinance Institutions (MFIs) in Accra Metropolis as the test case. The study used the loan default rate as a proxy variable to measure credit risk and examined the effect of some explanatory variables on loan default. Primary data was used, and the purposive sampling techniques were adopted to select 90 respondents from 20 Microfinance Institutions out of 43. The multivariate linear regression model was used to analyze the relationship between the dependent and explanatory variables. The results indicated that interest rates have a positive and significant effect on loan default whereas loan maturity period has a negative and significant effect on loan default. Also, Credit Officers' educational level have a negative and significant effect on loan default while having a marketing department has a positive and significant effect on loan default. However, the loan appraisal process, lending gap, and governance quality have no significant effect on loan default. Thus, MFIs should promote sound loan pricing policies in order to charge the appropriate interest rate and adopt loan repayment regimes that boost liquidity. Additionally, Credit Officers should be highly educated, and hence management of MFIs should put in place continuous development programs to upgrade the skills of all personnel in the credit delivery system in relation to best practices in lending.

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