CREDIT POLICY AND ASSET QUALITY OF MICROFINANCE INSTITUTIONS IN MALAWI

Abstract

By offering small loans, savings accounts, and insurance to groups that traditional banks do not currently serve, microfinance institutions (MFIs) contribute significantly to the provision of financial services to underserved populations. Despite their contributions, non-performing loans (NPLs), high default rates, and low repayment rates make it difficult for Malawi's MFIs to maintain asset quality. This study examined the impact of lending policies on the asset quality of Malawian MFIs. The study used a descriptive cross-sectional design in accordance with the principles of asymmetric information theory. A total of 84 MFIs were selected from the target population of 107 using basic random sampling techniques. Data was gathered using questionnaires from primary sources, and secondary sources were accessed using data collection sheets.The data was analysed using linear regression analysis and descriptive statistics. Asset quality was found to benefit statistically significantly from credit policy (β = 0.295, p = 0.003). The study concluded that improving asset quality and ensuring the survival of MFIs in Malawi requires carefully thought-out and consistently implemented lending policies. It is recommended that all MFIs implement uniform credit policies to improve payback rates, preserve asset quality, and enhance financial sustainability. To encourage responsible lending practices and consumer protection, lawmakers should employ efficient frameworks for credit policy.