Effects of Credit Risk Management on the Performance of Microfinance Institutions: In The Case of Gurage Zone

Abstract

The aim of this study was to investigate the effect of credit risk management on the performance of MFIs in the case of Gurage Zone, Central Ethiopia Region. The study employed descriptive survey and explanatory research design along with quantitative approach. The target population of the study was all employees in the six MFIs found inGurage Zone. 84 employees were the sample of the study. Purposive, proportionate stratified, and simple random sampling techniques were used to select MFIs, administrative towns andworedas and employees. Primary data were collected using self – administered questionnaires for employees of the selected MFIs. Descriptive statistics, correlation coefficient analysis, multiple linear regression analysis were used to analyze the quantitative data and to investigate the effect of credit policies, credit administration unit, top management support, credit assessment, credit monitoring, and debt collection practices on the performance of MFIs. All quantitative data were analyzed using a Statistical Package for Social Sciences (SPSS) version 26. The findings of the study revealed that all the five credit risk management practices have significant and positive effect on the performance MFIs, butdebt collection practice has no significant effect. However, 79.7% of the variations in the performance of MFIs were jointly accounted by the six variables, among these variables; top management support practice has the greatest contribution. Therefore, the performance ofMFIs in most of the administrative towns and words becomes stagnant, unless these credit risk management practices are appropriately pledged. Thus, this study suggests that management bodies of the MFIs in the zone better to give more emphasis by focusing robust credit risk management practices, so that MFIs can improve their performance and contribute to the broader economic development of the study area. Moreover, continuous evaluation and adaptation of these practices will be essential to navigating the dynamic financial landscape.