Effect of Joint Liability Lending Models on Loan Repayments Among Microfinance Institutions in Kenya

Abstract

The objective of this study was to establish the effect of joint liability (group) lending model effect on loan repayment rates among microfinance institutions in Kenya. Microfinance program is an effort to reduce poverty and improve life quality for the poor and low income individuals. This program enables borrowers who do not have any physical collateral but still can borrow small loans to realize their business ideas. However, despite many positive achievements, microfinance still faces the challenge regarding default risks. The objectives were: to establish the causes of default in group lending; to establish how screening and monitoring affects repayments rates; and to establish how enforcement mechanisms affect repayment rates among micro finance institutions in Kenya. The analytical techniques used were descriptive statistics in form of percentages, inferential statistics, Pearson correlation, ANOVA and multiple regression models. The study found out that joint liability has a strong positive effect on loan repayment because of social cohesion and better information flow. Joint liability lending mechanisms were effective in ensuring timely repayments of funds, instilling supervision and administration traits among the group members. The study concluded that the group mechanisms should be upheld as they ensure increased probability of repayment rates and leads to creation of customer loyalty. The findings further indicated the positive impact of business training on repayment rate as the MFIs, which offers business training to its clients, has had higher repayment rate and less default than the with no training. In addition, the loan issued is secured by the cosignature of members within the group and not by the microfinance institution. Each member will put pressure on the others in the group to meet the loan repayment schedule. Thus, group sanction is reducing defaults among members in microfinance as all members of a group are jointly liable for default.