Effect of Credit Management on the Financial Performance on Micro Finance Institution; Case study on OMO Micro finance institution Southern Ethiopia.

Abstract

Sound credit management is a precondition for a financial institution’s stability and continuing profitability, while failing credit quality is the most frequent cause of poor financial performance and condition. As with any financial institution, the main risk in micro finance is lending money and not getting it back. The study sought to determine the effect of credit management on the financial performance of micro finance institution; case study on OMFI in Ethiopia. The study adopted a descriptive survey design. The target population of study consisted of some selected 15 branches. Entire population was used as the sample giving a sample size of size of 90 employees. Purposive sampling technique was used in sampling where the entire population was included in the study. Primary data was collected using questionnaires where all the issues on the questionnaire were addressed to the respondents by the researcher and secondary data collected from annual report 2015-2019 financial statement. Descriptive statistics were used to analyze data. Furthermore, descriptions were made based on the results of the tables. The study found that client appraisal; credit risk control and collection policy had effect on financial performance of MFI in Ethiopia. The study determine that there was strong relationship between financial performance of Micro finance Institution and client appraisal, credit risk control and collection policy. The study recognized that client appraisal, credit risk control and collection policy significantly influence financial performance of Micro finance Institution in Ethiopia. Collection policy was found to have a higher effect on financial performance and that a stringent policy is more effective in debt recovery than a lenient policy. The study recommends that MFI should enhance their collection policy by adapting a more stringent policy to a lenient policy for effective debt recovery.