Factors Influencing Loan Repayment in Micro-Finance Institutions in Kenya

Abstract

Access to finance by entrepreneurs is paramount for their business to succeed. The existing microfinance institutions (MFI's) have tried to bridge the gap of credit accessibility to entrepreneurs but despite this the entrepreneurs have been defaulting on their loans. This study was carried out to analyze the factors influencing loan repayment in micro-finance institutions. The findings will assist the microfinance institutions in coming up with the most appropriate measures to apply in order to eliminate defaults. Descriptive survey was employed with a target population of 39 Loan Officers and 5280 registered MFI clients. A census of 39 loan officers was targeted and a sample size of 360 respondents from registered group members. Stratified proportionate sampling and simple random sampling were employed. Data was collected by use of questionnaires and interviews and analyzed using both descriptive and inferential statistics. The study established that education level, number of dependents, and hobbies were individual characteristics influencing loan repayment. Business characteristics influencing loan repayment were: length of operation, management and type of business. While the lenders characteristics were: groups handled, period taken to qualify new members and the criteria used to evaluate credit worthiness. The study recommends that the government and other stakeholders in the sector should ensure that prospective financial borrowers have access to formal education and training on business management and financing. The MFI's should reduce the time taken to process a loan application and develop models that are more effective in evaluating credit worthiness of their clients.