Abstract:
Microfinance institutions are among the institutions that provide different financial services for the
poor who are out of the conventional banking system, particularly in developing countries. The
objective of the study was to assess the effect of loan default on the operational performance of
MFIs in the case of PEACE Microfinance Share Company and the specific objectives of the studies
are to identify the current practice of branch staff on management of default loans in reducing the
effect of default loans on performance of MFIs, examine the factors that affect credit delivery
services of PEACE Microfinance, identify the effect of loan default on the performance of MFIs,
and identify the effect of loan default on profitability and sustainability. The study employed
descriptive research design, incorporating both quantitative and qualitative data collection
techniques. This study employs both quantitative and qualitative research approaches. In this
conceptual framework, loan default serves as the explanatory variable, while operational
performance represents the response variable. The researcher has employed descriptive research
with quantitative and qualitative methods. Both primary and secondary data has used in the
analysis of this study.
The study’s findings indicate that loan default significantly affects the operational performance of
the institution, including financial sustainability, growth, and outreach. Based on the research
findings, the following are recommended to eliminate loan default and improve the operational
performance of MFI's: enhancing credit risk management policies, borrower education and
financial literacy, and adopting new technologies to streamline their lending processes and
enhance their ability to detect and prevent loan default. Therefore, the PEACE MicrofinanceS.CO
should analyze the root causes of the delinquency and develop strategies to mitigate the risk of
loan defaults. I suggest that the organization may need to reconsider its loan loss provision
strategy in order to maintain sustainable profitability for year-to-year
