Geographic diversification and credit risk in microfinance

  • How does diversification reduce credit risk?

    Diversification of the credit portfolio is a method of managing credit risk.
    Company diversification tries to reduce risk while providing a potential degree of profit.
    If one business sector experiences a loss because of diversification, the profits of the other business segments can compensate for the loss..

  • What are the causes of credit risk in microfinance?

    Causes of High Credit Risk and managing them are (1) poor MIS, (2) poor screening of borrowers, (3) weak appraisal of loans, (4) unclear communication about product and methodology, (5) lack of immediate follow- up, (6) mixing with other social activities , (7) poor product, (8) natural disasters, (9) corruption at .

  • What are the credit risks of micro finance institutions?

    Credit risk encompasses the risks related to an MFI's credit activities.
    It is the most frequently addressed risk by MFIs since it directly affects their main earning asset: the loan portfolio..

  • What are the major risk associated to the microfinance industry?

    risks well.

    Credit risk.
    Credit risk, the most frequently addressed risk for MFIs, is the risk to earnings or capital due to. borrowers' late and non-payment of loan obligations. Liquidity risk.
    Liquidity risk is the possibility of negative effects on the interests of owners, customers and. Market risk..

  • As an example, a bank in Nigeria lends money to people so that they can buy sewing machines and get training to become tailors who sell clothing to make a living.
It can also be attributed to the fact that institutions tend to expand into similar economic areas with the same underlying systematic factors and therefore gain few diversification benefits. For these reasons, the net effect of geographic diversification in microfinance is higher credit risk.
The findings suggest that diversification and credit risk are positively related: geographic diversification comes with more credit risks. This risk can be attributed to the difficulty of monitoring remote operations.

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