Credit Risk Management and Loan Portfolio Quality in Microfinance Banks in Ebonyi State

The sustainability of microfinance banks in Nigeria is critically dependent on their capacity to manage credit risk effectively, as poor loan portfolio quality, manifesting in high non-performing loan ratios, threatens institutional viability and undermines the financial inclusion mandate of the sector. This study examines the relationship between credit risk management practices and loan portfolio quality in microfinance banks operating in Ebonyi State. The study is anchored on Modern Portfolio Theory adapted for credit risk, which emphasises diversification, risk assessment, and risk-adjusted return optimisation as central pillars of effective loan portfolio management. A cross-sectional survey design was employed. The population comprised credit officers, risk managers, and branch managers across 27 licensed microfinance banks in Ebonyi State. A sample of 120 respondents was selected using purposive and stratified random sampling. Data were gathered through structured questionnaires and secondary financial data from annual reports (2019 to 2023), and analysed using regression and correlation analyses. Findings reveal that rigorous borrower creditworthiness assessment, loan monitoring intensity, and collateral adequacy evaluation are the credit risk management practices most significantly associated with low non-performing loan ratios and high portfolio-at-risk metrics. The results further indicate that banks employing digitalised loan monitoring tools record 31 percent fewer loan defaults compared to those relying solely on manual tracking systems. It is concluded that structured and technology-supported credit risk management is essential for sustaining loan portfolio quality in microfinance banking. The study recommends that microfinance banks in Ebonyi State adopt credit scoring models and invest in digital loan management systems to improve risk assessment accuracy and recovery efficiency.

Keywords: Credit risk management, loan portfolio quality, microfinance banks, Ebonyi State, non-performing loans