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SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN
DEVELOPING COUNTRIES THROUGH SOUND CREDIT
RISK MANAGEMENT: EVIDENCE FROM BUSINESS
EXPERIENCE, PURPOSE OF LOAN, LOAN TERM, AND
PROFIT MAXIMIZATION MOTIVE

Charles K. Addo

Stephen B. Twum

ABSTRACT

Micro financing is a relatively new financial concept in developing countries, providing alternative source of savings and credit availability for people who, otherwise, cannot get access to those services from the mainstream financial intermediaries. It provides alternative savings opportunities and cheaper source of credit to members, notably of credit unions. Thus, microfinance institutions (MFIs) perform very important role in economic development. Sound risk management policies impact on the sustainability of MFIs. One study noted that low credit risk is directly related to the application of sound qualitative and quantitative risk management tools. Among those qualitative and quantitative risk management tools are the explanatory variables in this study. This  paper examined the impact of business experience, use of loan proceeds, loan maturity, and profit maximization motive on MFIs’ sustainability, the dependent variable. Results of the multiple regression were significant, F (5, 82) = 78.24, p < .005; suggesting policy prescription for MFIs: In making loans, MFIs must consider their own business  experience, nature or use of loan proceeds by borrowers, maturity or how long the loan funds will be tied up, and MFIs own profit maximization motive because they do impact on credit risk and of consequence MFIs sustainability.

Key words: Credit risk, microfinance institutions, sustainability, business experience, loan maturity

JEL Codes: E4, E5