Assessing institutional factors contributing to loan defaulting in microfinance institutions in Kenya

Abstract

The success of individual MFIs in credit risk management is largely reflected in the proportion of delinquency’s loans to gross lending. Factors such as credit policies, loan recovery procedures, and loan appraisal process are viewed as critical drivers of institutional factors leading to loan default; each of these factors significantly affects loan default performance in MFIs in Kenya. The study used primary data. The study target population compromise 48 MFIs registered by Association of Microfinance Institutions of Kenya (AMFIK). A descriptive survey design was used to carry out a census of 48 microfinance institution in Kenya, this is because of the small size population .The data was collected through a structured questionnaire and administered to MFIs loan officers for response. Multiple regression analysis was used to establish relationship between loan delinquency and credit policies, loan recovery procedures, and initial loan appraisal in MFIs in Kenya. A total of 48 questionnaires were administered of which 45 were adequately respondent to and considered for analysis, this formed 94% response rate. The findings indicated that all the three factors tested had a significant impact on the loan default rate, thus the micro-finance institutions have a cause to worry if they have to reduce the loan default rates by considering the three factors under the study It is recommended that the management of micro-finance institutions should take keen interest in the three institutional factors if they have to reduce their loan default portfolio in microfinance institutions. It is suggested that a similar study be undertaken targeting the banking sector to establish the factors that contribute to loan default in the banking sector in Kenya.