Impact of credit risk on profitability of microfinance institutions in Ghana

Abstract

The study sought to investigate the effect of credit risk on profitability of microfinances institutions (MFIs) in Ghana. using ROA as a measure of profitability, a panel data for a period from 2011 to 2020 on five MFIs operating in Ghana were selected. The 10-year panel data of the five MFIs were analysed using ordinary least square model (OLS). The study found that firm-specific factors which are firm size, ROA and interest rates in loans and macroeconomic factors thus GDP and inflation are statistically significant in determining credit risk. The study concludes that capital adequacy ratio (CAR), management quality and liquidity have negative effect on financial performance but non-performing loans (NPLs) has negative effect on profitability of the MFIs. It was recommended among others that MFIs in Ghana should develop reliable credit management strategy to reduce the rate of incidence of non-performing loans. The use of credit bureaus in this regard can be particularly useful in reducing information asymmetry during loan administration. To complement this, strict measures must be adopted to evaluate borrowers‟ ability to pay loans.