ASSESSMENT OF CREDIT RISK MANAGMMENT IN THE CASE OF BUUSAA GONOFAA MICROFINANCE INSTITUTION

Abstract

Managing financial risk is one of the main task needs great attention in finical industries because it has a power to affect all the operation of the company. Buusaa Gonofaa is one of Ethiopian MFI currently encountering an increasing default rate. And thus, this study analyses credit risk management of MFIs by specifically focusing on BG MFI. Descriptive approach was used by the researcher and 100% of respondents on the top managerial level were used for the study. The study clearly indicates that the company is providing group loan only and this loan is provided without any collateral, but using group liability approach. Role of credit management is mainly given for the group members. Group members manage each other than operation policy of the company. Also it is investigated that the company has different mechanism to monitor credit risk, but all mechanisms that the company has designed and implemented is not more effective in protecting the company from risk. Relatively client appraisal, screening, capacity based loan provisions are some of the mechanisms that the company is using, but revealed that it is not effective enough with the main problems of poor management in the company and poor policy implementation. Also it is investigated that the company has operation policy and the policy is not modified frequently with different reasons and the company has no standardized credit risk measuring tool. Thus, it is seen that the company is operating in risk environment and needs to design different mechanisms to minimize its future risk.