Loan Appraisal Protocol for Effective Microfinance Portfolio in Tanzania

Abstract

This paper attempts to determine the effects of loan application appraisal on microfinance institutions' portfolio performance in Tanzania. The study utilizes a random sampling method and ordinary least square regression model on 219 microfinance entities collected from Dar es Salaam, Morogoro, and Dodoma regions. The finding indicates borrower business income, capital of borrower, membership duration of the borrower, and social collateral of borrowers negatively and significantly influences portfolio at risk of microfinance entities. These results, therefore, reveal that (i) microfinance institutions can reduce microfinance portfolio at risk to consider sound cash flow of the main business of microfinance client to enhance repayments; (ii) microfinance institutions must provide credit facilities to borrowers with relatively high capital in their business; (iii) microfinance institutions should extend credits to borrowers who are frequently willing to access credit facilities to enhance regular repayments; (iv) microfinance institutions should encourage borrowers to use group lending when accessing credits for effective repayments and diminish the risk of the microfinance loan portfolio.