The Effects Of Lending Policies And Recovery Strategies On The Financial Performance Of Micro-finance Institutions In Abuja

The Effects Of Lending Policies And Recovery Strategies On The Financial Performance Of Micro-finance Institutions In Abuja

First Part

Introduction

1.1 Context Of The Study

The financial industry is considered one of the most important pillars of the economy. Through efficient monetary intermediation, the sectors serve as a catalyst for achieving sustainable economic growth (Littlefield et al., 2003). A robust financial system promotes investment by financing profitable business ventures, mobilizing savings, and providing services (González, 2008).

A lending policy is a declaration of a lending institution’s philosophy, regulations, norms, and criteria for approving or denying loan requests. Based on the applicable laws and regulations of the country, these policies determine which industries or businesses are eligible for loans and which are not. The primary objective of microfinance credit officers is to collect expeditious repayment. However, maintaining a 100 percent recovery rate is not a straightforward task, as certain borrowers may cause a variety of problems for a variety of reasons (Fischer, 2010).

Loan repayment is not always guaranteed and is frequently dependent on circumstances beyond the borrower’s control, thereby decreasing the proprietors’ return on equity. It is a risky endeavor that financial institutions will only undertake after a comprehensive and satisfactory examination of the project they are financing. Microfinance institutions focus primarily on loaning money to their members. Consequently, the formulation and implementation of such lending policies is one of the most crucial responsibilities of microfinance bank management.

The lending policy of an MFI must specify who will have access to how much money, for how long, and for what purpose. Therefore, lending rules should be properly drafted so that lending officials are aware of prohibited and authorized activities. In addition, lending regulations should be reviewed on a regular basis to ensure that financial institutions keep up with the economy’s dynamic and innovative nature, as well as the competitive climate in other sectors of the economy that are constantly evolving (Lizal, 2012). Consequently, effective loan management benefits not only financial performance but also the borrower and the nation’s economy as a whole. The failure to properly manage loans, which constitute the majority of a bank’s assets, will almost undoubtedly result in a sizeable proportion of non-performing assets. This has an effect on the financial performance of the institution and the economy as a whole.

Fischer (2010) defines debt collection as the process of pursuing overdue loans and successfully recovering them by persuading individuals in need of loans to attempt to repay their outstanding debts. Customers will typically go to great measures to avoid contact with the lender (bank), making debt recovery a difficult task. In most cases, the banking sector maintains a debt recovery section charged with monitoring loans before they become delinquent and attempting to collect the debt.

1.2 Description Of The Problem

The origins and causes of issue loans include a variety of errors that a microfinance organization may permit a borrower to commit, as well as errors that are directly attributable to deficiencies in microfinance credit administration and management. Some well-structured loans may develop problems due to the borrower’s unforeseen circumstances; however, management must protect a loan by all means possible to preserve its performance as measured by return on assets, earnings per share, return on equity, dividend per share, market to book ratio, and other metrics.

Since the majority of MFIs derive the majority of their revenue from the interest on loans made to small and medium-sized businesses, the effectiveness of their credit management system is crucial to their profitability.

This study aims to examine the influence of lending policies and recovery strategies on the financial performance of microfinance institutions in Abuja.

1.3 Purpose Of The Study

This study’s primary objective is to examine the influence of lending policies and recovery strategies on the financial performance of microfinance institutions in Abuja. Additional objectives include:

Determine the relationship between microfinance lending policies and financial performance in Abuja.

Determine the relationship between microfinance recovery strategies and financial performance in Abuja.

Examine the influence of lending policies and recovery strategies on the financial performance of microfinance institutions in Abuja.

1.4 Research Questions

The following topics serve as a guide for this study:

What is the relationship between microfinance institutions’ lending policies and their financial performance in Abuja?

What is the relationship between microfinance institutions’ recovery strategies and their financial performance in Abuja?

What impact do lending policies and collection strategies have on the financial performance of microfinance institutions in Abuja?

1.5 Importance of the Research

This study will shed light on the effects of lending policies and recovery strategies on the financial performance of microfinance institutions, not only in Abuja, Nigeria, but throughout the country as well. It will aid these institutions in taking the required actions. It will also be an addition to the literature on a subject related to this topic and provide materials for other researchers to conduct their own studies.

1.6 Radius Of Study

This study examines the impact of lending policies and recovery strategies on the financial performance of microfinance institutions. This study’s scope will be limited to only Abuja’s financial institutions, excluding all other financial institutions in other states.

1.7 Limitation Of The Study

Time was the only constraint encountered by the researcher during the course of this investigation.

1.8 Definition Of Terms

1. RECOVERY STRATEGIES: These are the methods chosen by an organization to restore normal operations following a disaster.

2. LENDING POLICIES: A set of guidelines and criteria established by a bank and utilized by its employees to determine whether a loan applicant should be approved or denied.

3. FINANCIAL PERFORMANCE: A subjective measure of a company’s ability to utilize assets from its core business and generate revenues.