Evaluating The Effectiveness Of Credit Risk Management Tools Essay

1565 WordsApr 25, 20157 Pages
CHAPTER ONE Introduction Zimbabwe’s financial sector has over the years been crippled by Non-performing loans. Non-performing loans arise from credit risk or default risk which as defined by Jorion(2003) is the risk of an economic loss from the failure of a counterparty to fulfill its contractual obligations. Its effect is measured by the cost of replacing cash flows if the other party defaults. Credit risk can thus be seen to contribute significantly to the profitability of an organization and hence the need to hedge against such risk. This study aims to assess the effectiveness of credit risk management tools which are being used by Microfinance institutions (MFIs) in Zimbabwe by assessing the effect of credit terms, client appraisal, credit control measures as well as credit collection policies on loan repayment. Microfinance Institutions by their nature are more vulnerable to credit risk owing to a number of reasons such as; that the primary clientele of MFIs consists mostly of those who face barriers in accessing financial products from traditional financial institutions Murdoch (2008), the scope of activities is mainly limited to lending that is a microfinance institution cannot engage into other activities done by the bank such as underwriting of securities and foreign trade operations among others . 1.1 Background of the Study Since the adoption of the multi-currency regime, Zimbabwean financial institutions have increasingly been facing challenges associated with
Open Document