Effects of Credit Policies on Delinquency Management of Microfinance Banks in Southwest, Nigeria

This study investigated the effect of credit policies on delinquency management of microfinance banks in Southwest Nigeria with the aim to examine the effects of credit standard and credit terms and condition on delinquency management of microfinance banks in Nigeria. Static Panel regression estimate which involved pooled regression, fixed effect estimate, random effect estimate, Hausman test were employed as the analytical techniques. Data on corporate governance (proxied by credit standard and credit terms and condition) and delinquency management (proxied by loan portfolio at risk) were obtained from Annual Financial Statement of respective microfinance banks over a period of seven (7) years from 2012 to 2018). Statistically, the study found that credit standard has positive and significant effect on loan portfolio at risk by (t =1.694070; p< 0.05); the study also discovered that credit terms has positive with a significant effect on loan portfolio at risk by (t =1.694070; p< 0.05). The result, therefore, implies that credit policy is very instrumental to delinquency management of microfinance banks in Nigeria based on their significant influences unlike corporate governance which has a negative impact on delinquency management. The study concluded that credit policy has positive and significant effect on delinquency management of microfinance banks in Nigeria. The study recommended that credit committees at all levels must work in co-ordination in order to ensure that credit is collected in a timely manner. Keyword: Credit Policies, Delinquency Management, Microfinance Bank, Nigeria. Introduction Credit policy is a guide to successful credit administration and benefits must be weighed against the cost to ensure the benefits are worth the effort of administering the credit. Benefits like increase in market share, retention of existing customers, acquisition of new ones must be weighed against costs like selling and production costs, administration costs incurred during assessment, supervision and collection of credit and bad debts losses (Pandey, 2007). According to Gasbarro, Sadguna and Zumwalt (2002), a financial institutions credit policy affects the performance of that institution. The International Journal of Academic Research in Business and Social Sciences Vol. 1 0 , No. 5, May, 2020, E-ISSN: 2222-6990 © 2020 HRMARS 458 credit policy of an institution affects the capital adequacy, asset quality, management quality, earnings and liquidity of a financial institution either positively or negatively depending on how well the policies are made and implemented. Among other factors, weakness in credit risk management has all along been cited as the main cause for lending in financial institutions (Richard, Chijoriga, Kaijage, Peterson & Bohman, 2008; Nyawera, 2013). On the other hand, delinquency refers to the difficulty of the borrower to fulfil his/her loan obligation as and when due (Lakshmypriya, 2013). Existence of high levels of loan delinquency problem in microfinance industry in most countries negatively affects the level of financial and non-financial services to SMEs (Ditcher, 2003; Aliu & Gakure, 2014). This stands as one of the major reasons why deposit money banks give less attention to the financing of Micro, Small and Medium Enterprises (MSMEs). High loan delinquency rates in MSMEs lending should be of major concern to the board of directors and policy makers in developing countries, because of its unintended negative effects on MSMEs financing (Addae-Korankye, 2014). The tendency that a microfinance banks may not receive its money (plus interest) from borrowers is high and often the most serious vulnerability in a microfinance institution (Warue, 2012). According to Warue (2012), since most microloans are unsecured, delinquency can quickly spread from a handful of loans to a significant portion of the portfolio. This contagious effect is worsened by the fact that microfinance portfolios often have a high concentration in certain business sectors (AddaeKorankye, 2014). Moreover, many customers may be exposed to the same external threats such as lack of demand for customer products, livestock disease outbreak, bad weather, etc. These factors create volatility in microloan portfolio quality, therefore heightening importance of controlling credit risk. In this regard, microfinance banks need a good and effective corporate governance system that highlights repayment problems clearly and quickly, so that loan officers and their supervisors can focus on delinquency (repayment rate) before it gets out of hand. In lending services, a default is the failure to pay back a loan (Munene & Guyo, 2013). Microfinance Certification Programme (MCP) (2010) opines that delinquency management can be measured by percentage of loan portfolio at risk and default rate. MCP (2010) further suggests that microfinance banks should be stringent in advancing credit facility to creditworthy customers in order to reduce default rate. Based on foregoing, microfinance banks in Nigeria are faced with the problem of loan delinquency/default, which may have long-term consequences if not addressed. Therefore, it is in the interest of the management and board of directors to fashion best credit policies which will have a bearing on the direction the firm takes and its ability to survive in the industry. This is because best and adequate credit policies ensure a firm is shielded from financial distress exposure in respect of loan delinquency (Donaldson, 2003; Ndumai, 2016). Firms with good, strong and adequate credit standard policies and terms will do better compared to the rest in the industry. When a firm embraces good and sound credit policies in its management and operations, it will have an effect on its financial profitability through significant reduction in delinquency/default rate, hence will attract more funds and be beneficial to all its stakeholders. However, poor loan administration leads to weak financial results, risky financing patterns and high delinquency/default rate. This will eventually make the banks to be prone to macroeconomic crises. The thrust of the study is to investigate the effects of credit policies on delinquency management of Microfinance banks in Southwest, Nigeria. In particular, the study examines: International Journal of Academic Research in Business and Social Sciences Vol. 1 0 , No. 5, May, 2020, E-ISSN: 2222-6990 © 2020 HRMARS 459 • the extent to which credit standard policy impacts delinquency management of microfinance banks and evaluate • how credit terms can impacts delinquency management of microfinance banks in Nigeria. Literature Review Conceptual Review Credit Policies and Risk Management Lending always involves some elements of risks stemming from circumstances which result from the nonpayment of the loan obligation when they fall due (Bwoma, Muturi & Mogwambo, 2017). When microfinance grants credit to its customers, it incurs the risk of nonpayment. Credit risk management refers to the systems, procedures and controls which microfinance puts in place to ensure the efficient collection of customer payments and minimise the risk of non-payment (Naceour & Goaied, 2003). Credit risk management forms a key part of a company’s overall risk management strategy. Weak credit risk management is a primary cause of many business failures. Many small businesses have neither the resources nor the expertise to operate a sound credit management system (Richardson, 2002). Credit policy of any organisation may be a lenient or stringent one depending on its approach. Accordingly, lenient credit policy refers to a situation where financial institutions tend to give credit facilities to customers very liberally, that is, credits are granted even to those customers whose credit worthiness are not known or are doubtful. On the other hand, stringent credit policy is one in which financial institutions offer credit facilities to their customers who have proven credit worthiness. The banks or organisations with stringent credit policy follow tight credit standard and terms and as a result, minimise cost, risks, and chances of bad debts and problem of liquidity (Bwoma et al, 2017). Loan Portfolio Loan portfolio constitutes loans that have been made or bought and are being held for repayment. Loan portfolios are the major asset of Microfinance institution. The value of the loan portfolio depends not only on the interest rates earned on loans but also on the likelihood that interest and principal will be paid (Jasson, 2002). Lending is the principal business activity for banks. The loan portfolio is typically the largest asset and the predominate source of revenue (Lillian, 2013). As such, it is one of the greatest sources of risk to a financial institution’s safety and soundness. Whether due to lax credit standards, poor portfolio risk management, or weakness in the economy, loan portfolio problems have historically been the major cause of losses and failures. Effective management of the loan portfolio and the credit function is fundamental to a Microfinance safety and soundness. Loan portfolio management (LPM) is the process by which risks that are inherent in the credit process are managed and controlled (Ogilo, 2011). Assessing LPM involves evaluating the steps the management takes to identify and control risk throughout the credit process. The assessment focuses on what management does to identify issues before they become problems. The identification and management of risk among groups of loans may be at least as important as the risk inherent in individual loans. For decades, good loan portfolio managers have concentrated most of their effort on prudently approving loans and carefully monitoring loan performance. Although these activities continue to be the mainstays of loan portfolio management, analysis of past credit problems, such as those associated with oil and gas lending, agricultural lending,