A study on the effects of credit risk on the capital adequacy, asset quality, management capability, earnings quality and level, and liquidity management ratios of seven selected risk-based supervised and regulated microfinance-oriented rural banks operating in Region III of the years 1999-2003

• Main Authors: Camaya, Angelo S., Reyes, Generosa Carmen C., Sison, Jennifer G.
• Format: text
• Language: English
• Published: Animo Repository 2005
• Subjects: Microfinance > Philippines; Small business > Finance; Banks and banking > Philippines; Finance and Financial Management
• Online Access: https://animorepository.dlsu.edu.ph/etd_bachelors/18498
• Institution: De La Salle University

Microfinance is one of the many financial services offered by rural banks to their clients. It is a loan activity generally offered to poor households. Credit risk is known to be highly visible in all loan activities. It was considered in the study since it is a major problem that rural banks engaged in microfinance face. This study aims to show the effects of credit risk to the financial condition of microfinance-oriented rural banks through their capital adequacy, asset quality, management capability, earnings quality and level, and liquidity management ratios, and to understand how rural banks react to and control credit risk. The study has used different ratios used in the CAMEL rating system, which are provided by the Bangko Sentral ng Pilipinas to rural banks, as indicators of the variables to be measured and assessed. Data were gathered from seven micofinance-oriented rural banks operating in the Region III provinces. This was for the reason that a huge number of rural banks are found in this area and that microfinance activities are very active in this region. The banks considered in the study were: Rural Bank of Porac, Inc., Cooperative Bank of Pampanga, Zambales Rural Bank, Inc., Gateway Rural Bank, Inc., Fil-Agro Bank, Cooperative Rural Bank of Bulacan, Inc., and Rural Bank of Mabalacat, Inc. Multiple regression analysis was used in determining the effects of the independent variable, credit risk, with the dependent variables, CAMEL. From the regressed results and data analyzed, it was concluded that credit risk is significant to capital adequacy, asset quality, earnings quality and level, and liquidity management and insignificant to management capability. Credit risk plays a crucial role in the performance of microfinance-oriented rural banks. With that, banks are advised to focus more on these significant areas of their performance since they are greatly affected by credit risk. In addition, the results show that microfinance is not a viable method of rural banks to earn profits since the significance of credit risk in most of the areas of their performance would entail smaller venues and larger expenses.