The Effects of Credit Collection Policy on Portfolio at Risk of Microfinance Institutions in Tanzania

Abstract

This paper presents the results of the study on the effect of credit collection policy on portfolio risk management among microfinance institutions in Tanzania. The study used cross-sectional survey data of microfinance institutions in three regions of Dar es salaam, Morogoro and Dodoma. Random sampling was employed to obtain a sample of 219 respondents in all three regions. Multiple linear regression analysis was used to determine the effect of credit collection policy on portfolio at risk of microfinance institutions. Results show that, in rates positively influence portfolio at risk of microfinance institutions. On the other hand, grace period on loans and loan size are negatively related to portfolio at risk of microfinance institutions. These results suggest that, microfinance institutions can focus on explanatory variables used in the study for enhanced quality of financial performance of the microfinance industry.

Social capital and loan credit terms: does it matter in microfinance contract?

“…It suggests that providing loans to microenterprises on favorable terms and conditions (sufficiency of the loan amount, charging reasonable/affordable interest rate and flexible repayment schedule) will enhance their loan repayment performance (better repayment rate, regular payment of debt as cum due and sufficiency of net income to pay the outstanding debt). The result is consistent with previous studies (Aslam et al, 2020;Love et al, 2016;Jote, 2018;Maiti et al, 2020;Ngonyani and Mapesa, 2018;Parvin et al, 2020).…”

“…Furthermore, most borrowers fail to achieve their loan deadlines due to high-interest rates (Jote, 2018). This is because a high-interest rate has been reported to have a negative relationship with credit demand and loan repayment performance (Maiti et al, 2020), where chances of loan default and loan delinquency are believed to increase with a higher interest rate (Ngonyani and Mapesa, 2018). Hence, the size of loans and interest charged by MFIs has become a debatable issue in the context of microenterprises.…”

Influence of Credit Risk Management Practices on Loan Performance: A Case of Selected Microfinance Institutions in Tanzania

“…However, this study does not consider the actual effect of credit supervision, credit appraisal, and credit monitoring on alleviating bad loans and enhancing loan performance. As opposed to that, Ngonyani & Mapesa (2019) provide insight into the portfolio performance of the microfinance sector as related to some socioeconomic characteristics of clients. Also, credit appraisal and verification variables such as the income of borrowers, membership duration of borrowers, social capital, and capital of borrowers are significantly influencing loan portfolio performance.…”

Challenges Faced by Petty Traders in Accessing Loans from Financial Institutions: Evidence from the Upper West Region of Ghana

“…The result will benefit from the suggestion in [25] that a financial institution can diminish portfolio risk by organizing training programs for traders in business record keeping and utilization of funds which will help in the repayment of the loan. A large minority said that their loans were disbursed on time, implying that more than half had their loan disbursement delayed which could probably hinder or defeat the purpose for which the loan was acquired which could affect the respondent's ability to repay the loan.…”

“…Most SME's suffer from a lack of, or poor record-keeping systems and undocumented business processes and contracting as they rely heavily on operators' memory and a trust-based business traction system [24]. A study indicated that microfinance institutions can diminish portfolio risks by managing training sessions to their businesses to increase knowledge in proper business record keeping and utilization of funds to successfully repaid the loan [25]. The SME sector in Tanzania has limited access to finance in that the sector is perceived as a high risk one coupled with their inability to fulfill the collateral requirements.…”