Abstract:
Poor access to credit has been a barrier to the poor households around the world who desire to improve their livelihood. The emergence of microfinance institutions has proven to be an appropriate, effective and powerful tool for enhancing access to credit and poverty reduction. Microfinance institutions have shown capacity to extend micro financial services especially credit to the low-income individuals.
However, microfinance institutions face high default rate from their clients leading to high risk in loan portfolios. Existing studies give mixed findings on the relationship between credit risk management and portfolio performance of microfinance institutions.
This study attempted to establish the influence of socio-economic characteristics of borrowers and microfinance risk management practices on portfolio performance of microfinance institutions; specifically on the effects of socio-economic characteristics, credit application appraisal, credit supervision practices and credit collection policy on portfolio performance of non-member-based microfinance institutions in Tanzania.
A Cross-sectional survey data from 219 non-member-based microfinance institutions in three regions of Dar es Salaam, Morogoro and Dodoma were used. Both quantitative and qualitative data were collected through questionnaires and key informants’ interviews. OLS linear regression model was used in order to examine the combined effect of all predictor variables of this study. Results shows that portfolio performance of microfinance institutions is related to some socio-economic characteristics of clients. Variable such as gender, family size, age and business experience are significantly related to portfolio performance of microfinance institutions. On the other hand, credit application appraisal variables such as membership duration of borrowers, income of borrowers, capital of borrowers and social capital are observed to be significantly related to loan portfolio performance.
Similarly, credit supervision practices variables of timely loan release, borrowers per loan officer, operational cost per borrower and training to borrowers are significantly related to portfolio performance of microfinance. Finally, credit collection policy variables such as interest rates, grace period and loan size are also found related significantly to portfolio performance of non-member-based microfinance institutions. The study recommends to microfinance entities to create strategic intervention on managing socio-economic characteristics of clients and credit risk management practices that threaten the portfolio performance of microfinance institutions in Tanzania.
