Credit management techniques applied by financial institutions offering micro credit in Kenya

Abstract

Over the years, banks have been absent in the provision of micro credit to the small and micro enterprises. The sector has remained the preserve of microfimmce Institutions (MFls). The liberalization of the financial sector has increased competition: hence banks are looking for avenues to expand their revenue base. The presence of a large undeserved market in the small and micro credit sector provides an opportunity. This paper highlights the issues that affect performance of the banks and MFls in the provision of micro credit; their credit management models and the impact of the models and related issues on the default rate of the institutions. The paper observes that banks lend to the sector using the individual lending model, while majority of the Micro-finance Institutions (MFls) use group-based model (Grameen). The study finds that properly administered credit programs do well whether individual or group-based loans. In case of poor administration, individual loans are more likely to perform poorly. The study finds that Bank products have a higher default rate than MFls since MFls treat micro credit as core and therefore expend effort and time on the services. The study concludes by encouraging banks to participate more in the provision of micro credit services using methods adopted by successful MFIs.