Lending Policies and Loan Performance of Microfinance Banks: Evidence from Kwara State, Nigeria

Rising levels of non-performing loans remain a persistent challenge to the sustainability and financial stability of microfinance banks in Nigeria, undermining their core mandate of extending credit to financially excluded households and small businesses. This study, therefore, examines the effects of lending policies on loan performance in deposit-taking microfinance banks in Kwara State, Nigeria. Using cross-sectional primary data obtained from 135 managerial and senior staff across 20 microfinance banks, the study employs an ordered logit regression model for data analysis. Diagnostic tests confirm the reliability of the research instrument and the adequacy of the model specification. The findings reveal that credit management policy and collection policy significantly improve loan performance by reducing the likelihood of loans becoming doubtful or loss while increasing the probability of performing loans. In contrast, interest rate policy exerts a strong negative effect on loan performance, as higher lending rates significantly increase loan losses and reduce the probability of loan repayment. Credit appraisal policy does not exhibit a statistically significant direct effect on loan performance. The study concludes that effective post-disbursement loan management and prudent interest rate policies are more critical to loan performance in microfinance banks than pre-loan screening alone. Therefore, the study recommends that microfinance banks should integrate appraisal processes with post-disbursement monitoring and borrower support mechanisms, rather than relying solely on pre-loan screening.