The effect of credit risk management practice on loan losses in micro-finance institutions in Kenya

Abstract

Credit risk is simply defined as the potential that a borrower or counterparty fail to meet its obligations in accordance with agreed terms. Borrowers should be subjected to stringent CRMP, this enable analyze the borrowers character, ability to repay their loans, margin of the venture that the loan is to finance, purpose for the loan emphasizing on viability, amount of the loan relative to the venture, repayments and insurance to caution risk defaulting on the loan. This study sorted to determine the CRMP on loan losses in micro finance institutions in Kenya. The sample frame constituted the commercial banks offering micro credit and micro finance institutions. The researcher adopted both the stratified random sampling technique as well as convenience sampling. Stratified random technique was used to select banks and registered MFIs within Nairobi, which are 31 in number. There were 52 respondents from various MFIs and banks offering micro credit services, this represented 83.8% response rate. It was found that MFIs use different strategies to reduce the risk of loan defaulting. The most common as cited by the respondents includes having collateral against the loaned amount and having strict and through policies on leading. Others included stringent loan evaluation procedures and having provisions to accommodate the default, use of credit, insuring loans and use of guarantors. Credit risk management practice was found to have direct negative correlation, the higher the credit risk management practice weighted score the lower the rate of defaulted loans.