The Effect of Credit Risk Management Practice on Firm Performance: The Case of Selected Micro- Finance Institutions in Ethiopia
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Date
2025-01-18
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AAU
Abstract
This study examines the effect of credit risk management practices on the performance of selected
microfinance institutions (MFIs) in Ethiopia. The research focuses on three institutions: Vision
Fund Microfinance Institution (VFMFI), Yegna Microfinance Share Company, and Nisir
Microfinance Institution. Utilizing both primary and secondary data, the study evaluates how
credit policies, risk assessment, and loan diversification strategies influence firm performance,
specifically Return on Assets (ROA). The research employs an explanatory research design and
statistical analysis tools, including regression and ANOVA, to investigate relationships between
variables. Key findings reveal that effective credit policies, robust risk assessment practices, and
strategic loan diversification significantly enhance financial performance. However, challenges
such as poor implementation, insufficient borrower profiling, and limited loan diversification were
identified as areas of concern. The study concludes that strengthening credit risk management
practices is vital for the sustainability and profitability of MFIs. Recommendations include policy
enhancements, staff training, and leveraging technology for improved risk assessment. This
research provides valuable insights for policymakers, practitioners, and stakeholders in the
microfinance sector, aiming to foster financial inclusion and economic development.