An Investigation into The Effect of Credit Management Practice on Financial Performance of Microfinance Institutions in Kasama District

The study was aimed at assessing the effects of credit management practices on the financial performance of MFIs. The major objectives of the study were to identify various credit management practices implemented by MFIs in Kasama district, to assess the effect of credit risk control in designing and formulating policy or regulations on financial performance in Kasama district and to determine the effect of collection policy to the customers who do not pay the firms bills in time as well as on financial performance of MFIs. The microfinance concept started penetrating the Zambian space economy after independence in 1964 when Zambia was liberated from the chains of political slavery. During the UNIP regime, microfinance concept remained largely unexplored and poorly understood by most Zambian stakeholders. The establishment of microfinance sector or concept led to the proliferation or increase in the number of microfinance institutions currently operating in the Zambian financial sector. It is worth noting that, Microfinance Institutions (MFIs) emerged as a new approach to provide quality financial services to the poor or to feel the gap that had been made with respect to the provision of financial services to small and medium enterprises, small scale farmers and low-income households or generally the poor. The study employed a descriptive research design because descriptive research designs are concerned with conditions or relationships that exist, opinions that are held, processes that are going on, effects or trends that are evident. This method was chosen to make references to phenomena as they existed in real life and it was relatively economical in terms of time and resources. The target population was 154 employees. For sampling, simple random sampling was used in selecting 113 employees. SPSS VERSION 25 was used in the analysis of data. The data shows that MFIs have developed appropriate credit policies to ensure that credit administration is done effectively and increasing the affect loan repayments and bad debts. Multiple regression analysis was used in testing the hypotheses of the study and establishing the strengths of the relationships. The results showed that all the three formulated null hypotheses were rejected resulting other adoption of the alternative hypotheses. In this regard, it can be said that credit risk management practices positively affect the financial performance of MFIs in Kasama district, credit risk control positively affect the financial performance of MFIs in Kasama district and that credit risk control positively affect the financial performance of MFIs in Kasama district. The study concluded that sound credit management is a prerequisite for a financial institution stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. As with any other financial institution, the biggest risk in deposit taking microfinance institution is lending money and not getting it back. The researcher recommends that effective management of credit is essential to the long-term success of any microfinance institution. Deposit taking microfinance institutions should ensure to a very great extent on the adoption of credit standards, credit policy, credit terms and collection polices. Keywords—credit management; financial performance; microfinancial management The International Journal of Multi-Disciplinary Research ISSN: 3471-7102, ISBN: 978-9982-70-318-5 2 Paper-ID: CFP/1273/2019 www.ijmdr. net I. 1.1 BACKGROUND Credit is one of the many factors that can be used by a firm to influence demand for its products. According to Horne and Wachowicz (2008), firms can only benefit from credit if the profitability generated from increased sales exceeds the added costs of receivables. Myers and Brealey (2003) define credit as a process whereby possession of goods or services is allowed without spot payment upon a contractual agreement for later payment. Micro-finance concept has operated for centuries in different parts of the world for example, “susus” in Ghana, “tandas” in Mexico, “tontines” in West Africa and “pasanaku” in Bolivia. One of the earliest and longest serving micro-credit organization providing small loans to rural poor dwellers with no collateral is the Irish loan Fund system initiated in the early 1700” s by Jonathan swift. His idea began slowly in 1840s and became a widespread institution of about 300 branches all over Ireland in less than one decade. The principal purpose was to advance small loans with interest for short periods. However, the pioneering of modern microfinance is often credited to Dr. Mohammad Yunus, who began experimenting with lending to poor women in the village of Jobra, Bangladesh during his tenure as a professor of economics at Chittagong University in the 1970s. There has been a development of a range of terms for defining microfinance in the literature recently. Given the achievement of microfinance as a prominent tool in poverty alleviation, the literature has defined microfinance as follows: Ledgerwood (2008) argued that microfinance is the provision of financial services to low income clients, including small traders, street vendors, small farmers, service providers (e.g.; hairdressers, rickshaw drivers), artisans and small producers. Similarly, Mersland and Strom (2008) state that microfinance provides financial services on a micro scale, such as microcredit, micro insurance, and micro savings for poor and low-income people. Meanwhile, Robinson (2002) proposes a broad definition of microfinance, which refers to small scale financial services, primarily credit and savings, provided to people who farm or fish or herd; who operate small enterprises or small business enterprises where goods are produced, recycled, repaired, or sold; provide small services, who work for wages and commissions; gain income from renting agricultural machinery to other individuals and groups at the local level in both rural and urban areas. Microfinance is the supply of loans, savings, and other basic financial services to the poor. " As these financial services usually involve small amounts of money small loans, small savings, the term "microfinance" helps to differentiate these services from those which formal banks provide. Microfinance institutions provide a reliable source of financial support and assistance compared to other sources for financing. Sources operating outside the microfinance industry typically form informal relationships with borrowers and have no real legal or substantial ties with their customers. As a result, loan terms tend to carry high costs with no guarantee that lenders will remain in one place for any length. In contrast, microfinance institutions typically work alongside government organizations and also have ties with larger global organizations. As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. Credit risk is a particular concern for MFIs because most micro lending is unsecured (i.e., traditional collateral is not often used to secure microloans Churchill and Coster (2011). The people covered are those who cannot avail credit from banks and such other financial institutions due to the lack of the ability to provide guarantee or security against the money borrowed. Many banks do not extend credit to these kinds of people due to the high default risk for repayment of interest and in some cases the principle amount itself. Therefore, these institutions required to The International Journal of Multi-Disciplinary Research ISSN: 3471-7102, ISBN: 978-9982-70-318-5 3 Paper-ID: CFP/1273/2019 www.ijmdr. net design sound credit management that entails the identification of existing and potential risks inherent in lending activities. Timely identification of potential credit default is important as high default rates lead to decreased cash flows, lower liquidity levels and financial distress. In contrast, lower credit exposure means an optimal debtor‟ level with reduced chances of bad debts and therefore financial health. According to Scheufler (2002), in today’s business environment risk management and improvement of cash flows are very challenging. With the rise in bankruptcy rates, the probability of incurring losses has risen. Economic pressures and business practices are forcing organizations to slow payments while on the other hand resources for credit management are reduced despite the higher expectations. Therefore, it is a necessity for credit professionals to search for opportunities to implement proven best practices. By upgrading your practices five common pitfalls can be avoided. Scheufler (2002) summarizes these pitfalls as failure to recognize potential frauds, under-estimation of the contribution of current customers to bad debts, getting caught off guard by bankruptcies, failure to take full advantage of technology, and spending too much time and resources on credit evaluations that are not related to reduction of credit defaults. The microfinance concept started penetrating the Zambian space economy after independence in 1964 when Zambia was liberated from the chains of political slavery. During the UNIP regime, microfinance concept remained largely unexplored and poorly understood by most Zambian stakeholders (MOF, 2017). The majority of industries were state owned and Zambia was one of the most prosperous countries in the Sub-Saharan Africa thereby making it possible to meet the needs of a small population (Chiara, 2017). Note that Zambian modern microfinance institutions vibrantly came on the scene in the early 1990s due to economic reforms which subsumed the privatization and liberalization of the financial sector (AgriProFocus, 2017). Apart from the drastic economic reforms in the financial sector, the failure of stateowned financial institutions also led to the establishment of the majority of Microfi