Credit risk management in small-scale farming by formal financial institutions during the COVID-19 era: Nigerian perspective

Abstract

PurposeProviding loans, particularly to small-scale farmers, is one of the roles of formal financial institutions. Lending to small farmers is risky. An institution's health is closely related to the institution's ability to manage credit and portfolio risk. Expanding smallholder farmers' access to finance while maintaining a sustainable financial system is essential; however, pandemics present additional challenges. Accordingly, as reported in the literature, the pandemic's high loan default rates and decreases in return on assets (ROAs) call for further credit risk management research. There have been limited studies on credit risk management during coronavirus disease 2019 (COVID-19), so this article aims to provide useful information on its influences.Design/methodology/approachResearchers used data from formal financial institutions in 2018 (before COVID-19) and in 2021 (during COVID-19) to accomplish the study's broad objective. Descriptive and inferential statistics were the main analytical tools. The credit risk management indicators were categorized into collateral management, loan management, loan recovery management, governance and Information and Communication Technology (ICT). Weights were assigned to each category based on the importance to credit risk management. A binary logit model was employed in assessing the factors influencing credit risk management as proxied to loan repayment, while Ordinary Least Square (OLS) was used to examine factors that influence ROAs.FindingsOne of the most noteworthy findings is that credit risk management is affected by different factors and magnitudes before and during the COVID-19 era. Loan recovery and ICT management indicators were most influential during the pandemic. In addition, the study noted that low agricultural productivity during the pandemic contributed to an additional challenge in loan default rates because of various COVID-19-containing measures. Additionally, there was a lack of governance and ICT management capacity to drive credit and portfolio risk management during the epidemic.Originality/valueThe paper presents new empirical findings on credit risk management during the COVID-19 era. The study used a methodology which has not been used previously in credit risk management in Nigerian financial institutions. Therefore, this research could become the cornerstone of further academic research in other developing countries using this methodology.