A Survey Of Techniques Of Credit Risk Management In Micro-Finance Institutions In Kenya

Abstract

The objective of the study was to identify the techniques used by micro finance institutions in the management of credit risk in Kenya, and to examine the main challenges facing the micro finance institutions operating in Kenya in the management of credit risk.

To satisfy the research objectives, the study used a descriptive research design comprising a sample of thirty (30) micro finance institutions. The sampling frame included the Central bank of Kenya Directory (2006) of micro finance institutions. Purposive sampling was used to select one credit officer and one loan officer from each of the sampled institutions.

Primary data was collected using semi-structured questionnaires. The questionnaires were dropped and picked up later and others sent and received via email. The target respondents were the institutions' loans and credit officers. Once the pertinent data were collected the researcher carried out analysis of the same using mean scores, percentages and standard deviations.

The study established that most microfinance institutions use 6C techniques of credit risk management The study also revealed that understanding the organizations exposure to the customers is treated as critical by the micro finance institutions. To avoid loan losses, the microfinance institutions use follow ups. The study established that MFI's take loan review analysis as crucial aspects of risk management by doing proper documentation and analysis. The institutions also resolve to taking litigations in situations where the borrower's financial situation and structure have been altered and the original promised value of collateral differ. The study established that majority of the institutions used CreditMetrix to measure the credit migration and default risk.

The results show that the microfinance institutions are faced with the challenge of strict operational regulations from the Central Bank of Kenya. The government has also not put any policy in place that concerns the operations of the MFls. Loan recovery is still a challenge to majority of the institutions.