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

Chapiter 1

Introduction

1.1 The Study’s Background

One of the most important foundations of the economy is thought to be the banking sector. The sectors act as a catalyst for achieving long-term economic development through efficient monetary intermediation (Littlefield et al. 2003). By supporting lucrative business initiatives, utilizing savings, and delivering services, a strong financial system promotes investment (Gonzalez, 2008).

A lending institution’s philosophy, regulations, norms, and criteria that are formed and applied by its staff when approving or rejecting a loan request are stated in its lending policy. These policies determine which industries or enterprises will be approved for loans and which will be avoided based on the applicable laws and regulations of the country. The prompt repayment of loans is the major objective of credit officers in the microfinance industry. Maintaining a 100% recovery rate, however, is a difficult task because some members of the borrowing group may give rise to a range of problems for a number of different reasons (Fischer, 2010).

Lending is extremely risky because loan repayment is frequently based on factors beyond the borrower’s control and is not always guaranteed, which reduces the owners’ return on equity. Financial institutions only engage in this risky activity after doing an adequate and complete review of the project they are funding. Lending money to members is the main goal of microfinance institutions. Development and implementation of such lending policies are therefore among the management of microfinance banks’ most important jobs.

The amount of money that will be made available to whom, for how long, and for what reason must be specified in an MFI’s lending policy. So that lending officials are aware of activities that are both forbidden and allowed, lending rules should be appropriately established. Additionally, lending regulations should be regularly reviewed to make sure that financial institutions remain competitive in the face of other emerging economic sectors as well as the economy’s creativity and dynamism (Lizal, 2012). Therefore, managing loans effectively benefits not only financial performance but also the borrower as well as the whole economy of the nation. A considerable chunk of a bank’s assets—loans, which make up the majority of its holdings—will almost likely become non-performing assets as a result of poor loan management. This in turn has an effect on the economy as a whole as well as the financial performance of the organization.

Debt collection is the process of pursuing unpaid loans and effectively recovering them by persuading the borrowers to attempt to repay their overdue debts (Fischer, 2010). Normally, collecting debts is a challenging task since clients will go to tremendous efforts to avoid the lender (bank). In most cases, the banking industry maintains a debt recovery division that is in charge of monitoring loans before they are due and making an effort to collect the debt.

Situation Of The Problem

A wide variety of mistakes that a microfinance organization may permit a borrower to make, as well as mistakes that are directly related to weaknesses in microfinance credit administration and management, are the origins and causes of issue loans. Some well-constructed loans may experience issues as a result of unforeseeable events involving the borrower; however, management must make every effort to safeguard a loan in order to maintain its performance as gauged by return on assets, earnings per share, return on equity, dividend per share, market to book value ratio, and other metrics.

The effectiveness of their credit management system is essential to their profitability because the majority of MFIs rely on interest earned on loans made to small and medium businesses for the majority of their revenue.

In this study, the financial performance of microfinance institutions in Abuja will be compared to lending policies and recovery tactics.

1.3 Study’s Objective

This study’s main goal is to look into how lending practices and financial recovery plans affect Abuja’s microfinance institutions’ financial performance. Additional goals include:

1. To ascertain the link between lending practices and Abuja’s microfinance institutions’ financial performance.

2. To establish a link between recovery plans and the financial success of Abuja’s microfinance institutions.

3. To look into how lending practices and recovery plans affect the financial health of Abuja’s microfinance institutions.

1.4 Questions For Research

The following queries serve as the study’s compass;

1. How do lending practices and Abuja’s microfinance institutions’ financial results relate to one another?

2. What is the connection between Abuja’s microfinance institutions’ financial performance and recovery strategies?

3. How do lending rules and recovery plans affect the financial health of Abuja’s microfinance institutions?

1.5 Relationship To Other Studies

This study will have a big impact on microfinance institutions, not only in Abuja but all over Nigeria since it will raise understanding about how lending rules and recovery techniques affect their ability to make money. It will support these institutions in taking the required activities. It will also contribute to the body of knowledge on the subject and give other researchers the tools they need to conduct their own research.

1.6 The Study’s Scope

The financial performance of microfinance organizations’ lending practices and recovery plans will be examined in this study. All other financial institutions in other states will be ignored because the scope of this study will only include financial institutions in Abuja.

Limitations of the research

The lack of adequate time was the sole restriction the researcher encountered while doing this investigation.

1.8 Term Definition

1. RECOVERY STRATEGIES: Simply put, these are the strategies a company uses to get back to business as usual after a crisis.

2. LENDING POLICIES: A collection of rules and standards created by a bank and applied by its staff to decide whether to approve or deny a loan application.

3. FINANCIAL PERFORMANCE: An arbitrary indicator of how effectively a company can employ resources from its main line of business to create income.