Loan Management Practices as Key Drivers for the Operation Efficiency of Microfinance Institutions in Northern Mindanao, Philippines

In the context of increasing worries over the sustainability and performance of microfinance institutions (MFIs) in the face of increasing credit risks, this research examines the influence of non-performing loan (NPL) management practices on the operational efficiency of MFIs in Northern Mindanao, Philippines. Utilizing a descriptive-correlational design, data were gathered from 200 personnel of different MFIs using a structured questionnaire. The study explores four major loan management areas namely procedures of creditworthiness appraisal processes, loan monitoring and follow-up practices, methods of risk handling, and recovery of loans and how this impact working efficiency, especially in regard to the payment and recovery of loans. Results confirm high agreement by the respondents on the performance of these practices, and high mean scores point to the most important role of accurate credit judgments and active loan management in maximizing business efficiency. Correlation analysis verifies that all four loan management practices are positively correlated with business efficiency, meaning any improvement in them is linked with enhanced business performance. Moreover, the multiple linear regression analysis confirms the overall significance of the model and identifies that loan management practices that are being analyzed are significant to ascertain operational efficiency. Surprisingly, loan recovery methods were found to be the most important among all, and then loan follow-up and monitoring procedures. In contrast, while in isolation, credit assessment methods and risk management techniques did not reflect statistically significant effects on operational efficiency. The research concludes that the most critical area to enhance the operational performance of MFIs is the innovation of loan recovery techniques and monitoring processes. More importantly, there is an urgent need to improve credit evaluation processes and risk management practices to ensure operational effectiveness.