The Influence of Credit Risk Management on Financial Performance of Microfinances in Zimbabwe Dissertation

Abstract

This study was an examination of the influence of credit risk management on the financial performance of microfinance in Zimbabwe. It was motivated by the fact that the RBZ operations report for MFI on the performance of MFIs indicated that there is lack of compliance in that regard despite legal requirements to that effect. The same also was noted by the Zimbabwe Association of Microfinance Institutions (ZAMFI) in its surveys in 2021 and 2022 as it noted a lack of compliance by 62% of the MFIs with regard to the establishment of risk management departments. In this study, the use of multiple methods in a mixed-methods approach enabled triangulation, which involves cross-validating findings from different data sources and methods. The current study adopted the explanatory research design. From the 206 credit-only MFIs in Zimbabwe, the current study made use of only 10 MFIs. The sample size was determined using the Raosoft calculator found on Raosoftcalculator.com. For this study, the sample was determined to be 294. The study adopted a stratified sampling because it allows the researcher to divide the population of microfinance institutions into relevant subgroups or strata based on specific characteristics. The study reveals a positive and strong relationship between Nonperforming loans and financial performance (r=.555) and there was a significant statistical association between Non-performing loans and financial performance. Findings point to a positive a positive and strong relationship between credit risk management and financial performance (r=.567) and also there was a significant statistical association between credit risk management and financial performance. The study found a positive and weak relationship between credit rating system and purchase intention (r=0.006) and there was no significant statistical association between credit rating system and market share. The study also found a positive and strong relationship between collateral evaluation system and financial performance (r=560) and there was a significant statistical association between collateral evaluation system and financial performance. It is suggested that strategies to enhance credit risk management for effective financial performance of MFIs can include; implementing a robust credit risk assessment framework to enhance credit risk management and improving the financial performance of MFIs. It also came out that regular monitoring and proactive management of the loan portfolio are key strategies to enhance credit risk management. It is concluded that there is a significant relationship between Non-Performing Loans (NPLs) and credit risk management in microfinance institutions (MFIs). Effective credit risk management practices, such as robust credit assessment frameworks, regular monitoring of loan portfolios, and proactive management of delinquencies, have been found to reduce NPL ratios and improve the financial success of MFIs. It is concluded that there is a negative effect of implementing a credit rating system on the financial performance of MFIs. It is also concluded that collateral evaluation systems do play a significant role in the financial performance of MFIs. Effective collateral evaluation helps MFIs assess the value and quality of collateral offered by borrowers, reducing credit risk and potential losses. It is recommended that Microfinance Institutions develop robust credit risk assessment frameworks and establish comprehensive credit risk assessment processes, including borrower evaluation, collateral assessment, and repayment capacity analysis. Regularly update and refine these frameworks based on industry best practices and regulatory requirements.