Abstract:
This study aimed to assess the impact of credit risk management on loan portfolio performance of microfinance institutions in Rwanda, case of URWEGO Finance CBC. Specific objectives were to assess various dimensions of credit risk management, including the effectiveness of credit risk identification practices, assessment techniques, monitoring and control methods, and the overall relationship between credit risk management and loan portfolio performance. A descriptive research design was employed; the study involved 52 purposively selected respondents from URWEGO Finance CBC, all of whom are directly engaged in credit risk management. Data were collected from both primary and secondary sources through structured questionnaires and financial reports, and subsequently analyzed using descriptive and inferential statistics. The findings reveal a significant emphasis on reviewing business proposals and plans to identify potential credit risks, alongside a valued practice of character analysis, which includes evaluating the credit history of loan applicants. Respondents indicated a strong focus on assessing repayment capacity and evaluating the credit trustworthiness of clients as critical techniques for predicting loan defaults. Analyzing business profitability, efficiency, and leverage before loan disbursement was deemed moderately applied; the adoption of loan recovery methods to mitigate non-performing loans received strong endorsement. Respondents agree with regular visits to debtors for business performance assessments, the practice of recovery meetings, and proactive client notifications regarding outstanding amounts were highly applied. The use of group lending mechanisms and strict compliance with approval terms were noted as significant practices, complemented by regular reviews of collection policies. In conclusion, the study establishes a significant positive relationship between credit risk management and loan portfolio performance of microfinance institutions in Rwanda. Recommendations for URWEGO Finance CBC include enhancing credit risk control practices by implementing loan securitization, conducting thorough audits, and employing a comprehensive vetting process for clients. Additionally, the institution should consider insuring loan portfolio, pricing loans according to client risk levels, and diversifying credit facilities across various sectors and locations. Regular updates of borrowers' credit files, and the formation of a credit evaluation committee are also recommended to effectively mitigate risks and lower non-performing loans.
