Relationship between credit risk management practices and the level of non-performing loans of microfinance institutions in nyeri county

Abstract

The management of non-performing loan has been a major challenge facing financial institutions. According to the Central Bank of Kenya‟s Bank Supervision Annual Report 2011, in the MFI sector, the net loan portfolio grew by 13.3%, however, the profit before tax dropped by 19% between 2010 and 2011. The reduction in profits was partly attributed to increased provisions for nonperforming loans. The objective of this study therefore was to establish the relationship between credit risk management approaches employed by MFIs in Nyeri County and the level of NPLs. To achieve the objective of the assessment, primary data of the research was collected through administering questionnaires to 44 respondents of selected MFIs from their various levels of employment, that is, the top, middle and low level management. The data was then analyzed using Spearman's correlation coefficient statistical method. The study found that the level of credit risk assessment and management was high in the MFIs. The study also found that the organizations have specified credit collection period. Respondents unanimously indicated that effective management of their institutions was affected by liquidity and profitability, and that asymmetric information in loan market affects the effective management of NPLs in MFIs in Nyeri County. The study found that inability to enforce covenants leads to NPLs among MFIs in Nyeri County to a very large extent. 90% of the respondents indicated that the inability to enforce covenant was high. In conclusion, the study found that the relationship between credit risk management approaches employed by Micro Finance Institutions in Nyeri County and the level of Non-Performing Loans is a negative correlation i.e. the higher the level of credit risk management, the lower the level of NPLs.