CREDIT MANAGEMENT PRACTICES AND NONPERFORMING LOANS IN MICROFINANCE INSTITUTIONS IN NAIROBI COUNTY, KENYA.

Abstract

The Kenyan microfinance industry faces many challenges. Studies point to nonperforming loans as one of the main problems facing microfinance institutions in Kenya, which has led to reduced profitability and institutional collapse in some cases. Noncompliance with credit monitoring and loan policy provisions have been cited as some of the factors leading to increased nonperforming loans. This research sought to investigate, how techniques employed for managing credit by microfinance institutions effect levels of nonperforming loans and then formulate potential suggestions on how the problem of nonperforming loans can be mitigated. The main objective was to determine whether and how credit management procedures affect Nairobi County microfinance institutions. The specific objectives that served as a guide to this research were as follows: to ascertain the effect of credit monitoring, credit appraisal and credit risk controls affect nonperforming loans in the microfinance institutions of Kenya’s Nairobi County. This study was moderated by the size of the microfinance institution on loan nonperformance among microfinance institutions in Nairobi County. Theories guiding the study were Information Asymmetry Theory, Loan Pricing Theory and Financial Accelerator. The study’s main goal was to assess how credit management methods in Nairobi County’s microfinance institutions affect the amount of nonperforming loans. The study employed causal research design where quantitative approach was adopted. Random sampling was adopted where data was obtained from 48 microfinance institutions in Nairobi County. The population constituted 192 respondents comprising general managers, credit managers, finance officers and accountants. The study sampled 128 staffs who responded to questionnaires designed in a 5-point Likert scale. Data was subjected to analysis by use of SPSS, where correlation demonstrated possible relationships of variables while regression predicted the effects of changing variables on the defaulted loans. The study found that there was a positive significant effect of credit monitoring practice, Credit appraisal practice, credit risk control practice and size of microfinance on loan nonperformance among Microfinance entities in Nairobi County, Kenya. The credit monitoring practice (β=-0.498; p_value 0.000 < 0.05) while credit appraisal (β = 0.173; p_value 0.000 < 0.05). Credit risk control practice had (B=0.742, p_value 0.000 < 0.05) whereas size of microfinance had (β=0.007; p_value 0.003 < 0.05). The null hypotheses rejected and alternative hypotheses accepted that credit monitoring practice, Credit appraisal practice, credit risk control practice and microfinance size have a significant effect on loan nonperformance among Microfinance entities in Nairobi County, Kenya. Based on the findings of the study, the researcher recommends that Microfinance entities should strengthen credit-monitoring practices to minimize debt writing off and loan nonperformance. The study further recommends credit risk control practice to stakeholders. These facilitate understanding of an organization's risk profile and risk appetite; clarifies thinking on the nature and effect of risks; and improves the organization's risk assessment approaches. The study recommends adoption of asset growth strategies to strengthen the microfinance size. This study may benefit MFIs managers, employees, the government policy makers and researchers.