The Relationship Between Borrowing Interest Rates and Nonperforming Loans in Deposit Taking Micro Finance Institutions in Kenya

Abstract

Over the last five years, the country has witnessed a tremendous increase in the number of the Deposit Taking Microfinance Institutions. This can be attributed to the fact that some of the Microfinance Institutions have transformed themselves into the Deposit Taking Microfinance Institutions. Although this institutions were established to assist low income by providing cheaper credit, it has however not been the case as borrowing interest rates have been on the increase over the years .The borrowers now have to contend with the additional funds demanded by the DTMs and those who are unable to repay end up being defaulters. The objective of this study therefore was to find out whether there exists a relationship between borrowing interest rates and the level of nonperforming loans in the Deposit Taking Microfinance Institutions in Kenya. The study involved collecting secondary data from Central Bank of Kenya, individual Deposit Taking Microfinance Institutions and the Association of Microfinance Institutions in Kenya. Consequently data for four DTMs was analyzed for five years (2008-2012) using SPSS statistical software and results presented in graphs, regressions and coefficients. Test of significance was further carried out. The results showed that there was no significant relationship between borrowing interest rates and nonperforming loans in the Deposit Taking Microfinance Institutions Kenya. This study therefore concludes that there could be other factors which could be responsible for the nonperforming loans in the DTMs in Kenya. The study therefore recommends further study to be carried out on other variables which could be responsible for the nonperforming loans such as judicial processes and corporate governance.