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ABSTRACT
Micro financing is a relatively new financial concept in developing countries, providing alternative source of savings and credit availability for people who, otherwise, cannot get access to those services from the mainstream financial intermediaries. It provides alternative savings opportunities and cheaper source of credit to members, notably of credit unions. Thus, microfinance institutions (MFIs) perform very important role in economic development. Sound risk management policies impact on the sustainability of MFIs. One study noted that low credit risk is directly related to the application of sound qualitative and quantitative risk management tools. Among those qualitative and quantitative risk management tools are the explanatory variables in this study. This paper examined the impact of business experience, use of loan proceeds, loan maturity, and profit maximization motive on MFIs' sustainability, the dependent variable. Results of the multiple regression were significant, F (5, 82) = 78.24, p < .005; suggesting policy prescription for MFIs: In making loans, MFIs must consider their own business experience, nature or use of loan proceeds by borrowers, maturity or how long the loan funds will be tied up, and MFIs own profit maximization motive because they do impact on credit risk and of consequence MFIs sustainability.
Key words: Credit risk, microfinance institutions, sustainability, business experience, loan maturity.
JEL Codes: E4, E5
I. INTRODUCTION
Microfinance is a relatively new invention that emerged as a source of finance developmental vehicle especially in developing countries following the seminal works of McKinnon (1973) and Shaw (1973). Ledgerwood (1999) observed that microfinance has evolved as an economic development approach through the provision of alternative savings opportunities and cheaper credit to members, notably of credit unions. Ledgerwood's observation is buttressed by Patil (2011) regarding microfinance institutions' (MFIs) very important role as vehicles of economic development. Gupta, Chaula, & Harkawat (2012) have reported that huge number of people resident in developing countries have gained access to mainstream financial services through microfinance programs. Nevertheless, the authors noted that resources are still very limited in serving the numerous people who still remain un-served because the demand for financial services far exceeds the currently available supply. Thus, to provide financial services to poor people in developing countries on continuing basis requires that microfinance institutions employ prudent credit risk practices.
However,...