The Role of Microfinance Institutions in Credit Risk Mitigation

Abstract

This study examines how microfinance institutions address the persistent challenge of credit risk and maintain loan portfolio quality in diverse operating environments. Using a systematic literature review of peer-reviewed studies published between 2017 and 2021, the article synthesizes current evidence on the effectiveness of operational, analytical, and governance-based strategies in mitigating credit risk. The review identifies key patterns in borrower assessment, monitoring practices, institutional structures, and market dynamics that influence repayment behavior and portfolio performance. The discussion compares findings across regions and methodological approaches to evaluate the strengths and limitations of existing practices. The study concludes that effective credit risk mitigation requires a combination of disciplined lending processes, data-supported evaluation tools, responsive governance systems, and borrower-centered engagement strategies. It also highlights the importance of adapting risk management approaches to local economic conditions and institutional capacities.