ASSESSMENT OF CREDIT MANAGEMENT PRACTICES IN THE MICROFINANCE INSTITUTIONS IN THE KUMASI METROPOLIS

Abstract

Many Microfinance Institutions in the Kumasi Metropolis have been plunged into financial crisis and threatens to collapse due to nonperforming loans and high credit risk. Motivated by this back round this study sought to assess the credit management practices of the Microfinance Institutions in the Kumasi metropolis. The objectives of the study were to determine the criteria used in identifying credit worthiness of their clients, identify the problems encountered in the recovery of credits granted by the Microfinance Institutions and to examine the mechanisms used to recover their loans. The design used in the study was descriptive survey design. The sample size for the study was 42 consisting of credit managers selected from 206 Microfinance Institutions in the study area using multistage and simple random sampling technique.Questionnaire was used as the main instrument to collect primary data from respondents and the data was analyzed using SPSS version 20.0. The results indicated that, the MFIs encounter some major problems such as inadequate collateral, diversion of loan, client business failure, poor credit policy, high credit risk and inadequate appraisal.The study also revealed that most of the credit managers are well trained and professionals who have experience in credit management practices. The study again identified credit risk control, credit policy, credit terms, client appraisal and credit payment system as the major factors strongly influencing credit management practices in the MFIs in the study area.The study also found that loan default was a major problem in the MFIs, and identified high interest rate, inadequacy of follow-up, unfavorable business climate, inadequate appraisal and loan diversion The results also showed that the MFIs recover their loans through court action, collection agents, personal visit, letter and telephone calls. These constitutes the mechanisms through the MFIs recover their loans.The study therefore recommend credit managers utilize the 5c's among other important conditions when assessing the credit worthiness of the clients. This will ensure that the rampant default is ameliorated.Also MFIs should strengthen their policies for effective credit management. Credit managers, and other stake holders must review policies related to credit risk control, credit policy, credit terms, client appraisal and credit payment system and interest