Loan Quality Metrics and the Performance of Microfinance Banks in Nigeria

This research explores the effect of loan quality measures on the performance of microfinance banks (MFBs) in Nigeria, with Return on Assets (ROA) as one of the main performance indicators. Twenty MFBs were purposively selected with data spanning from 2019 to 2023, specifically the study focused on how Loan-to-Deposit Ratio (LDR), Default Rate (DR), and Credit Risk Ratio (CRR) affect MFBs performance. The findings suggest that a higher LDR positively contributes to an improvement in ROA, indicating that properly managed lending tend to enhance profitability through greater interest income. On the contrary, DR and CRR are found to decrease ROA, stressing the need for effective management of DR and CRR to enhance profits. These results support a balanced lending policy and robust risk management practices within MFBs. The study contributes to the existing body of knowledge on risk and MFBs performance in developing countries and is highly valuable for policymakers and financial managers willing to strengthen Nigeria’s Microfinance sector.