CREDIT RISK MANAGEMENT AND THE PERFORMANCE OF MICROFINANCE BANKS IN SOUTH-WEST NIGERIA

Abstract

Developing economies like Nigeria need a vibrant microfinance industry to fast-track and sustain their economic growth. However, lending activities in this sub-sector is often characterized with credit risk, which has remained a bane among banks in the industry. Therefore, this study examined the effect of credit risk management on the performance of microfinance banks in south-west Nigeria. Ordinal (primary) and panel (secondary) data were used in the study. The ordinal data were used to evaluate the effect of credit management strategies (proxy by credit term, client appraisal and collection policy) on the loan performance of 180 sampled microfinance banks. The ordinal data were sourced from the responses to a research questionnaire by credit managers/officers in the sampled banks. The panel data were used to examine the effect of credit risk (proxy by non-performing loan and loan-loss provision) on the financial performance (proxy by returns on assets) of six purposively selected microfinance banks. The selected banks are the six largest microfinance banks in south-west Nigeria. The panel data were sourced from the published financial reports of these banks covering the periods 2012 to 2019 (8 years). The Kruskal-Wallis rank test, the ordinal logistic regression technique, the panel OLS technique and the Granger-causality test were used to determine the relationships among the variables in the objectives. The results revealed a significant difference in the distribution of collection policy, as a credit management strategy, across the unit and state categories of the microfinance banks. The study also found a significant and positive effect between client appraisal and loan performance (chi-square stat = 8.971 and p = 0.003<0.05), and a significant but negative effect between non-performing loan and returns on assets (t-stat = -2.27 and p = 0.03<0.05). Further findings revealed a unidirectional causality flow from non-performing loan to loan-loss provision and from loan-loss provision to returns on assets. The study concluded that non-performing loan (measured as a credit risk indicator) and client appraisal (measured as a credit management strategy), significantly predicted performances of microfinance banks in south-west Nigeria. The study therefore recommended that microfinance banks should develop policies that will enhance regular monitoring of their loan portfolios in order to reduce defaults. It was further recommended that government should create and maintain a functional and effective Credit Information Reporting system in the microfinance banking sub-sector to assist the banks in carrying out thorough client appraisals. Furthermore, government should through their relevant agencies, ensure microfinance bank’s compliance with relevant provisions of the law as it concerns debt accumulation and credit risk management.