Effects of Lending Policies on Financial Performance of Microfinance Institutions in Tanzania

Lending policies refer to the institution's statement of its philosophy, standards, guidelines and criteria developed by financial institutions and used by its employees to be observed in granting or refusing a loan request. Application of lending policies encourages the practice of good governance, efficient allocation of resources and cushion against future financial losses by the MFIs. This study assessed the effects of lending policies on financial performance of microfinance institutions in Tanzania; the case of Moshi Municipality. Using a cross-sectional research design; It was found out that lending policies indeed affect financial performance of MFIs. Lending policies help MFIs to lend prudently; so strict adherence to lending policies controls the risk appetite in MFIs, monitors aggressive lending and improves financial performance of MFIs in terms of sustainable growth of loan portfolio, improved collection rates and building financial sustainability. The study recommends that the Bank of Tanzania (BoT) should regulate MFIs and ensure that board of directors of MFIs formulate and oversee implementation of lending policies to improve financial performance of MFIs.