Determinant of Loan Portfolio at Risk in Microfinance Institutions: Evidence from Sub Saharan Africa

Abstract

The aim of microfinance is to alleviate poverty through the delivery of financial support services such as microcredit facilities particularly to the poor entrepreneurs and micro enterprises. Extending microcredit is one of the core businesses of microfinance institutions. However not all the microcredit granted to the poor entrepreneurs perform well in addition of generating the expected returns. This adverse effect has a significant influence on the loan portfolio at risk. In reference to the major role the microfinance industry plays, the study was conducted to establish the determinants of loan portfolio at risk in the microfinance industry. The purpose of this study is to examine the determinants of loan portfolio at risk in the microfinance industry of sub Saharan Africa. The study used fixed and robust fixed effect regression empirical model to estimate the significant influence of each variable on loan portfolio at risk. Furthermore, dataset of 162 microfinance institutions from the MIX market within the sub region (SSA) was used for the empirical estimation. The results from the tested empirical estimation show that extent to saving, inefficiency and number of client outstanding has a strong influence on loan portfolio at risk (statistically significant at p< 0.05). Likewise leverage was statistically significant at p <0.1 level. The other remaining variables were not statistically significant. The findings suggest that lack of adequate information and monitoring are attributes of higher loan portfolio at risk. Hence it will be of importance that Microfinance adopts the following measures, capacity building programs, information sharing mechanisms and increase in monitoring activities. Understanding the factors that affect loan portfolio at risk is essential for portfolio risk management. This paper adds to empirical literature on the determinants of loan portfolio at risk in the microfinance industry of Sub-Saharan Africa.