A Survey on the Operating Efficiency and Loan Portfolio Quality Indicators Usage by Microfinance Institutions in Kenya

Abstract

Over the years, there has been an increase in the number and significance of micro-finance in both matured and emerging economies. In year 2008, the Kenyan Government operationalized the Micro-finance Act 2006 with an aim to mainstream micro-finance to the financial system proper and also to regulate the many Micro-finance Institutions (MFIs) operating under different legislations. The main objective of this study was to survey the credit risk management practices among MFIs in Kenya. This was a descriptive survey study. The population of interest of this study was the MFIs in Kenya. The researcher used structured questionnaires as the main data collection instrument. The questionnaires had both open and close-ended questions. The close-ended questions provided more structured responses to facilitate tangible recommendations. The researcher perused completed questionnaires and document analysis recording sheets. Quantitative data collected was analyzed by the use of descriptive statistics using SPSS and presented through percentages, means, standard deviations and frequencies. Correlation inferential analysis was employed for analysis. Content analysis was used to test data that was qualitative in nature or aspect of the data collected from the open ended questions. The information was displayed by use of bar charts, graphs and pie charts and in prose-form. The study concludes that most of the MFIs used operating efficiency and loan portfolio quality indicators as a credit risk management practice. Most MFIs employs loan portfolio quality and operating efficiency indicators such as repayment rate, portfolio at risk, number of active borrowers per credit officer, number of active borrowers per staff, gross portfolio outstanding per credit officer, number of active borrowers per branch, cost per loan made and cost per unit of currency lent to measure credit risk. The study recommends that MFIs need to strengthen the credit risk management practices by using credit referencing and profitability indicators. In addition, the study recommends that MFIS to employ a combination of portfolio quality, operating efficiency and profitability indicators to measure performance. These indicators provide an indication of whether an MFI is earning an adequate return on the funds invested in the MFI by shareholder and investors.