Impact Of Credit Risk Management On Financial Performance Of Ethiopian Microfinance Intitutions: The Case Study Of Somali Microfinance Institution Share Company

Abstract

A effective credit risk management is the ability to intelligently and efficiently manage customer credit lines. In order to minimize exposure to bad debt, over-reserving and bankruptcies, companies must have greater insight into customer financial strength, credit score history and changing payment patterns. Moreover, financial performance is company’s ability to generate new resources, from day- to- day operations, over a given period of time; performance is gauged by net income and cash from operations. This paper examined the impact level of credit risk management towards the financial performance of Somali microfinance Share Company. Also, The main purpose of this study is to describe the impact level of credit risk management on financial performance of the microfinance. The research design followed was determine by the nature of the problem statement or more specifically by the research objectives. Hence in this study survey, exploratory and caused variables are used. The researcher was selected Somali microfinance Share Company and collected the necessary data from the microfinance by using purposive sampling technique. To collect the necessary data for this study, the researcher was used secondary sources. The sources of secondary data for the study were annual reports from 2010 to 2013. In addition, the quantitative method was used in order to fulfill the main purpose of this study. To examine its impact level the researcher used multiple regression models by taking 4 years Return on Equity (dependent variable), Nonperforming Loan Ratio and Capital Adequacy Ratio (independent variables). To examine its impact level the researcher used multiple regression models by taking 4 years. Since microfinance institutions are set up to provide credit and other financial services to the poor it is imperative that the management of such credit services be sound in order to mitigate the high risks involved. Thus, credit risk management determines the success and survival of micro finances. Weak credit risk management leads to capital erosion and eventual failure, whereas sound credit risk management guarantees profitability and sustainability.