The Effect of Credit Policy on the Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Abstract

This study was carried out with the purpose of establishing the effects of credit policies on the financial performance of Micro finance institutions.According to Hartarska (2005) microfinance is the provision of small scale financial services to low income or unbanked people while a credit policy isan institutional method for analyzing credit requests and its decision criteria for accepting or rejecting applications (Girm` 1996).MFIs in Kenya are classified and registered into three different tiers: deposit-taking institutions such as banks, credit only non deposit taking institutions, and informal organizations supervised by an external agency other than the government. This study concentrated on the deposit taking micro finance organizations. The Objective of the study was to find out the effects of credit policy on financial performance of deposit taking micro finance organizations. A lot of DTM’s business evolves around the credit part and this study is to help us understand the role played by the credit policy on financial performance. The researcher used a census approach for the six deposits taking micro finance organizations in Kenya to get the data required. The main way of getting information was through secondary data from the central bank of Kenya and the individual institutions. The findings indicated a positive significant relationship (r = 0.199) implying that credit policies affects the financial performance of deposit taking micro finance organization with a minimal effect since there other more factors that affect financial performance with a greater effect. The results of the regression analysis indicate that the dependent variables are both individually and jointly significant and have an effect on financial performance. From the values of the coefficients we discern that the independent variables are correlated to the dependent variable. The results indicated that credit standard policy significantly affects credit financial performance (â=47.9, pvalue= 0.48), credit terms by (â=-86.5, p-value=0.123) and collection effort by (â=-129.5, p-value=0.383). In conclusion, the study established that the three independent variables significantly affect financial performance. From the study, it is recommended that deposit taking micro finance organizations should not concentrate so much on the credit policy but also other factors since even though credit policies affect DTM’s financial performance.