EFFECT OF CREDIT POLICY ON LOAN PERFORMANCE OF MICRO FINANCE INSTITUTIONS IN MOGADISHU, SOMALIA

Abstract

The general objective of this study was to examine the effect of credit policy on loan 
performance of microfinance institutions. The specific objectives were; to determine the 
influence of Credit Procedures on loan performance of microfinance institution in Mogadishu 
Somalia, to find out the influence of Credit Standards on loan performance of microfinance 
institution in Mogadishu, Somalia, to establish the influence of Credit Information on loan 
performance of microfinance institution in Mogadishu, Somalia and to establish whether 
there is a significant relationship between credit limit and the loan performance in 
microfinance institutions in Mogadishu - Somalia. In Somalia the MFI sector has been 
growing rapidly which may have been caused by internal and external factors. Sound credit 
management is a prerequisite for a MFIs stability and continued profitability while credit 
delinquency is the cause of poor financial performance and condition. carefully documented 
credit policy should be able to able to serve the purposes of defining the organizations 
objective on credit extension, define the authority and responsibilities credit granting, specify 
training policy for credit professionals, monitor activities for credit staff and give 
performance targets and create a customer – company culture. Microfinance business is a 
new growing sector in Somalia and not much study that have been conducted to study the 
effect of credit policy on loan performance. The study addressed this gap by assessing the 
effect of credit policy on loan performance in microfinance institutions. This study took a 
descriptive survey design using a comprehensive questionnaire prepared by the researcher to 
help to obtain data in order to answer the research questions. The researcher used descriptive 
analysis, percentages and frequencies to analyze the results from the questionnaires using 
Statistical Package for Social Science (SPSS version 22). According to the findings, it was 
clear there was a positive correlation between the independent variables, credit policy 
procedure, Credit Policy Information, Credit Policy Standards, Credit Limit and dependent 
variable Loan Performance. The correlation analysis between each of the independent 
variables with the dependent variable (loan performance) produced the correlation 
coefficients of 0.833, 0.547, 0.704 and 0.785.704. . From the findings it was established 
that loan extension is one of the primary sources of profitability to microfinance institutions 
however with high risk of having non performing loans if care is not taken before giving out 
loans. From the study findings it was concluded that microfinance institutions need to 
formulate credit policies to enable the management of credit risks and increase loan 
performance.