Credit Risk Management Practices in Small Business Lending Lessons from African Financial Institutions

Abstract

This study examines the impact of credit risk management practices, credit scoring systems, and risk monitoring frameworks on loan performance, approval rates, and repayment rates within financial institutions. Given the increasing complexity of credit markets and the necessity for robust risk management mechanisms, this research employs regression and multivariate analyses to assess the relationships among these variables. The findings reveal that while credit risk management practices negatively affect loan performance, they serve as a critical determinant in mitigating default risks. Credit scoring systems significantly enhance loan approval rates, emphasizing the importance of structured assessment models in facilitating credit accessibility. Additionally, risk monitoring frameworks play a pivotal role in improving repayment rates thereby reinforcing the necessity of continuous borrower evaluation and oversight. However, the multivariate analysis indicates that when considered collectively, credit risk management remains the dominant factor influencing loan performance, whereas the significance of credit scoring systems and risk monitoring frameworks is attenuated. These results underscore the interplay between credit assessment mechanisms and risk mitigation strategies in shaping financial institutions' lending outcomes. The study concludes that an integrated approach to credit risk management can optimize lending decisions and improve financial stability. It further recommends that regulatory bodies establish frameworks that balance risk sensitivity with credit accessibility to promote sustainable credit markets