THE EFFECTS OF LENDING POLICIES AND RECOVERY STRATEGIES ON THE FINANCIAL PERFORMANCE OF MICRO-FINANCE INSTITUTIONS IN ABUJA

CHAPTER ONE

INTRODUCTION

1.1 BACKGROUND OF THE STUDY

The financial industry is considered to be one of the economy's most significant pillars. Through effective monetary intermediation, the sectors serve as a facilitator for attaining long-term economic development (Littlefield et al. 2003). A robust financial system encourages investment by funding profitable company ventures, mobilizing savings, and providing services (Gonzalez, 2008).

A lending policy is a declaration of a lending institution's philosophy, rules, norms, and criteria established and used by its personnel in approving or declining a loan request. Based on the country's applicable laws and regulations, these policies decide which industries or businesses will be authorized for loans and which will be avoided. Credit officers' primary goal in a microfinance business is to collect prompt payback. However, maintaining a 100% recovery rate is not a simple job, since certain individuals of the borrowing group may cause a variety of issues due to various reasons (Fischer, 2010).

Lending is very hazardous since loan repayment is not always guaranteed and is often dependent on circumstances outside the borrower's control, lowering the owners' return on equity. It's a hazardous endeavor into which financial institutions only jump after a thorough and acceptable examination of the project for which they're financing. Microfinance institutions are primarily concerned with providing loans to its members. As a result, one of the most significant tasks of the management of microfinance banks is the development and execution of such lending policies.

A MFI's lending policy must specify how much money will be made accessible to whom, for how long, and for what purpose. As a result, lending rules should be properly written so that lending officials are aware of prohibited and permitted activities. Furthermore, lending rules should be reviewed on a regular basis to ensure that financial institutions keep up with the economy's dynamic and creative character, as well as the competitive climate with other evolving economic sectors (Lizal, 2012). As a result, properly managing loans has a beneficial impact not just on financial performance but also on the borrower and the country's economy as a whole. Failure to manage loans, which account for the majority of a bank's assets, will almost certainly result in a significant proportion of non-performing assets. This, in turn, has an impact on the institution's financial performance as well as the economy as a whole.

Debt collection is the process of chasing unpaid loans and successfully recovering them by persuading the persons in need of loans to try to return their outstanding debts (Fischer, 2010). Normally, recovering debts is a difficult job since customers will go to great lengths to make themselves unavailable to the lender (bank). In most instances, the banking sector maintains a debt recovery section that is in responsibility of following up on loans before they become overdue and attempting to collect the debt.

1.2 STATEMENT OF THE PROBLEM

The genesis and causes of problem loans include a wide range of blunders that a microfinance organization may allow a borrower to commit, as well as blunders that are directly related to flaws in microfinance credit administration and management. Due to unforeseen circumstances on the part of the borrower, some well-constructed loans may develop problems; however, management must strive to protect a loan by all means possible in order to preserve its performance as measured by return on assets, earnings per share, return on equity, dividend per share, market to book value ratio, and other metrics.

Because most MFIs rely on interest generated on loans given to small and medium businesses for the majority of their revenue, the efficiency of their credit management system is critical to their profitability.

This study seeks to investigate the effects of lending policies and recovery strategies on the financial performance of micro finance institutions in Abuja.

1.3 OBJECTIVE OF THE STUDY

The primary aim of this study is to investigate the effects of lending policies and recovery strategies on the financial performance of micro finance institutions in Abuja. Other objectives includes:

1. To determine the relationship between lending policies and the financial performance of Micro finance institutions in Abuja.

2. To determine the relationship between recovery strategies and the financial performance of Micro finance institutions in Abuja.

3. To investigate the effects of lending policies and recovery strategies on the financial performance of micro finance institutions in Abuja.

1.4 RESEARCH QUESTIONS        

The following questions guide this study;

1. What is the relationship between lending policies and the financial performance of Micro finance institutions in Abuja?

2. What is the relationship between recovery strategies and the financial performance of Micro finance institutions in Abuja?

3. What are the effects of lending policies and recovery strategies on the financial performance of micro finance institutions in Abuja?

1.5 SIGNIFICANCE OF THE STUDY

This study will be significant to Micro finance institutions not only in Abuja but also across Nigeria in the sense that it will create awareness on the effects of lending policies and recovery strategies on the financial performance of micro finance institutions. It will assist these institutions to take the necessary actions needed. It will also be an addition to literature on a subject matter pertaining to this topic and provide other scholars with materials to carry out their own research.

1.6 SCOPE OF THE STUDY

This study will cover the effects of lending policies and recovery strategies on the financial performance of micro finance institutions. The scope of this study will be limited to financial institutions only in Abuja, therefore overlooking all other financial institutions in other states.

1.7 LIMITATION OF THE STUDY

The only limitation faced by the researcher during the course of this study was that of sufficient time.

1.8 DEFINITION OF TERMS

1. RECOVERY STRATEGIES: Simply refers to the methods chosen by an organization to restore operations to normal following a disaster.

2. LENDING POLICIES: A set of guidelines and criteria developed by a bank and used by its employees to determine whether an applicant for a loan should be granted or refused the loan.

3. FINANCIAL PERFORMANCE: A subjective measure of how well a firm can use assets from its primary mode of business and generate revenues.