Assessing Institutional Factors Contributing To Loan Defaulting In Microfinance Institutions in Kenya

Abstract

The main goal of every microfinance institution (MFI) is to operate profitably in order to maintain its stability and improve growth and sustainability. However, existence of high levels of loan default problem in microfinance industry negatively affect the level of private investment and constrain the scope of microfinance institution credit to borrowers as MFIs have to compensate for loan default/delinquency losses. 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 loan delinquency occurrence; each of these factors significantly affects loan delinquency performance in MFIs in Kenya. The study used primary data. The study target population compromise 59 MFIs registered by Association of Microfinance Institutions of Kenya (AMFIK). A descriptive survey design was used to carry out a census of 59 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.