The role of credit risk management in the liquidity position of microfinance companies in Ghana_ case study of selected microfinance institutions in the Kumasi metropolis

Abstract

The purpose of the study was to assess the role of credit risk management in the liquidity position of microfinance companies in Ghana: case study of selected MFIs in the Kumasi Metropolis. The researcher used descriptive research approach. Quantitative research approach was used. The target population of the study was made up of employees of selected MFIs in the Kumasi Metropolis that comprised of 156 employees. Census method was used to select all the 156 respondents for the study. Questionnaire was the main instrument used to gather primary data. The statistical analysis such as frequencies, percentages and mean were used to analyze the questionnaire. The study findings concluded that the credit risk reduction tools that were used by the MFI to manage loan default were staff training, client project evaluation, internal controls, customer affordability calculation, credit granting policy, debt collection techniques and credit scoring models. The factors MFI considered before granting loans to clients were ability to pay, future prospects of the business, profitability of the business, cash flow statement, profit and loss statement, security, character of customers, borrower repayment history and experience of credit utilization. The credit risks faced by microfinance institutions were over reliance on guarantors, carelessness and poor underwriting typically evidenced by inadequate loan documentation, lack of current financial information and a lack of protective covenants in the loan agreement, communication ineffectiveness and ineffective loan monitoring cause loan default. The study recommended that the management of the MFI must organize periodic workshops and seminars to educate credit officers on loan approval, credit appraisal techniques, loan supervision strategies and monitoring strategies to improve loan recovery in the MFI.