Scribd
Upload
11 views

5

Microfinance institutions (MFIs) are focusing on financial sustainability and performance by managing credit risks associated with lending to low-income individuals. Effective credit risk management involves establishing clear policies and procedures to minimize loan defaults, which is crucial for MFIs' profitability and operational efficiency. The Philippine government supports microfinance as a means of poverty alleviation, and the sector has seen significant growth, prompting further research into the factors influencing MFIs' financial performance.

Uploaded by

Jonathan Alug
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
11 views

5

Microfinance institutions (MFIs) are focusing on financial sustainability and performance by managing credit risks associated with lending to low-income individuals. Effective credit risk management involves establishing clear policies and procedures to minimize loan defaults, which is crucial for MFIs' profitability and operational efficiency. The Philippine government supports microfinance as a means of poverty alleviation, and the sector has seen significant growth, prompting further research into the factors influencing MFIs' financial performance.

Uploaded by

Jonathan Alug
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 2

Introduction

Microfinance institutions (MFIs) today aim to become more commercially viable and enhance

their financial performance. This involves assessing the outcomes of their policies and operations in

financial terms, often reflected in indicators such as return on investment, return on assets, and value

added..

MFIs provide essential financial services, including loans, savings, and other basic offerings, to
low-income households, microenterprises, small-scale farmers, and household-based
entrepreneurs who are excluded from traditional banking services. These financial products
typically involve smaller amounts—hence the term "microfinance"—to distinguish them from
the larger-scale services provided by formal commercial banks.

One of the primary risks MFIs face in lending is the potential for loan defaults, particularly the
non-repayment of both principal and interest. This credit risk is a significant concern for MFIs
because they lend to individuals who often lack the collateral or guarantees required by
traditional financial institutions, making microloans typically unsecured. As a result, MFIs must
implement effective credit management strategies to identify and mitigate risks, ensuring the
efficient collection of payments and reducing the likelihood of defaults.

For MFIs seeking financial sustainability, managing credit risk is crucial. Credit risk
management involves setting up systems, procedures, and controls to maintain an optimal level
of credit while minimizing the risk of non-payment. In commercial banks, key factors for
effective credit risk management include the establishment of clear credit policies, procedures
outlining the scope and allocation of credit, and a structured credit administration system with
proper controls.

Scheufler (2002) emphasized that a well-formulated and well-understood credit policy aligns the
goals of a financial institution and allows management to maintain appropriate standards for loan
approvals, reducing risks and enabling business development. Furthermore, it is the
responsibility of management to create a credit administration team that ensures proper record-
keeping, loan terms preparation, and the safeguarding of securities.

The board of directors is ultimately responsible for approving and reviewing the MFI’s credit
risk strategy, policies, and procedures. The strategy should outline the institution’s acceptable
risk tolerance and profitability expectations. Senior management, in turn, is tasked with
implementing this strategy and developing the necessary policies and procedures to manage
credit risk effectively. According to Wyman (2002), successful credit risk management is a vital
component of a broader risk management framework, crucial for the long-term success of any
financial organization. Ndwiga (2010) further noted that effective credit risk practices should
encompass risk identification, evaluation, control, and a robust credit policy manual.
In response to financial system reforms and deregulation in recent years, developing countries,
including the Philippines, have seen an increasing role for the private sector in providing credit
and guarantee programs, with the government taking a less active role. The Philippines has
developed a favorable business environment for MFIs, helping to expand the outreach of
financial services. In 2012, the country ranked first globally in terms of its microfinance policy
and regulatory framework and was among the top ten in the overall microfinance business
environment (The Economist Intelligence Unit, 2012).

The Philippine government has long recognized microfinance’s crucial role in poverty
alleviation. In 1997, the Bangko Sentral ng Pilipinas launched the "National Strategy for
Microfinance," which outlined core principles for the policy. These principles emphasized that:
(1) the poor need continuous access to financial services, which is more important than interest
rates; (2) the poor have the ability to repay loans and save; and (3) MFIs can achieve operational
and financial self-sufficiency. These guiding principles have shaped subsequent regulations
designed to help microfinance institutions balance their goals of broad outreach and financial
sustainability.

From providing vital financial services to underserved communities to fostering a growing


industry focused on operational efficiency and sustainability, the Philippine microfinance sector
has expanded significantly. This growth underscores the importance of further research to
examine factors that influence an MFI’s financial performance from a credit risk management
perspective.

In Tarlac City, as of August 2, 2021, there were 15 MFIs officially registered with the Bangko
Sentral ng Pilipinas (https://www.bsp.gov.ph/SitePages/FinancialStability/DirBanksFIList.aspx).
However, the inability of many MFIs to manage credit risks effectively often leads to reduced
profitability as they struggle with rising bad debts, which in turn increases interest rates and can
slow down economic growth. This issue poses a threat to their ability to meet strategic business
objectives. Therefore, this study aims to investigate how MFIs, particularly rural and thrift
banks, manage credit risks to enhance their financial performance within the financial sector.

You might also like