The Effect Of Loan Default On Operational Performance Of Microfinance Institutions (The Case Of Peace Microfinance Share Company)

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