The impact of loan default on profitability of microfinance institutions in Zambia: A case study of Liquidity Solutions Limited

Abstract

The purpose of this study was to determine the impact of loan defaults on the profitability of Microfinance Institutions (MFIs) in Zambia. The study sought to identify the determinants of loan default in microfinance institutions, and the impact of loan default on microfinance profitability. The study used a descriptive evaluation design. A total of 392 people were polled. Purposive and random sampling approaches were used in the investigation. For data collection, questionnaires and interview guides were used. According to the study, non-performing loans at MFIs are the result of poor credit assessment by loan officers, a lack of loan monitoring, and inadequate recovery measures. The study found that a fall in demand for products and services sold by loan clients because of the COVID-19 outbreak and load shedding that happened during the study period is another reason for default. The study suggests reducing loan default by suspending loan disbursement during natural disasters such as COVID-19, suspending interest accumulation on principal if the borrower is experiencing financial difficulties, consistent monitoring, a good corporate governance system, credit evaluation, loan security, reliable loan software, good loan recovery strategies, and ensuring prudent loan policies. The study also discovered that SME clients defaulted at a higher rate than salary loan borrowers. It was also discovered that loan default has a detrimental impact on the financial success of microfinance institutions.