This study aimed to assess the effect of credit risk management (CRM) on the profitability of microfinance institutions (MFIs) in Mongu, Zambia. The objectives were to evaluate the existing CRM framework, its effect on revenue, and its impact on operational costs. Using a mixed-method approach data were collected from a sample of nine MFIs. The study addresses a critical research gap, the lack of empirical studies linking specific CRM practices to profitability outcomes within Zambian MFIs, particularly Mongu. The findings revealed that all MFIs have formal CRM frameworks and adhere strictly to credit appraisal procedures, 100% response from MFIs, regularly conduct creditworthiness assessments, and train staff on risk identification and mitigation. Regarding revenue, effective CRM practices were found to significantly enhance loan repayment rates (100%), reduce defaults, and improve interest income and revenue collection (88.9%). One-sample t-tests confirmed these observations, with significant results (p = 0.0067). With regard to Cost, findings showed that 88.9% of MFIs agreed that CRM increases operational expenses due to monitoring, credit assessments, and staff workload, while 69.7% recognized that investments in CRM systems and training are cost-effective in the long term. One-sample t-tests confirmed to have a significant impact on increasing costs with p = 0.0467. The study concluded that CRM is pivotal in enhancing MFI profitability by strengthening revenue streams and minimizing default risks despite higher operational costs. It recommends improving collateral requirements, adopting robust credit scoring systems, continuous staff training, and leveraging digital CRM technologies to improve efficiency and cost management. Thus, the results confirm a strong relationship between credit risk management and profitability, confirmed by the statistically significant tests (p < 0.05). This study contributes to existing literature by providing qualitative, context specific evidence from Mongu, Zambia, showing how CRM frameworks affect both revenue generation and cost structures.
Nyumba et al. (Sun,) studied this question.