Factors influencing loan repayment in microfinance institutions in Meru municipality, Kenya

Abstract

This study was carried out to analyze the factors influencing loan repayment in micro-finance institutions. This was after the observation that despite various mechanisms being put in place, the level of loan defaults in mfis was still high thus threatening growth, existence and even their survival. The research covered the mfis within the Meru municipality. Three independent variables were analyzed which were: business characteristics, borrowers’ characteristics and lenders characteristics that influence loan repayment. Loan default was discussed as the dependent variable. Descriptive survey was employed with the target population being 39 Loan Officers of registered micro finance institutions and 5280 registered mfi clients from various groups in Meru Municipality. A census of 39 loan officers was targeted and a sample size of 360 respondents from registered group members. The sampling was done using stratified proportionate sampling and simple random sampling methods. Data was collected by use of questionnaires and interviews and analyzed using both descriptive and inferential statistics. Frequency tables were used for presentation of the study findings. The study established that education level, number of dependants, and hobbies were individual characteristics influencing loan repayment. Business characteristics influencing loan repayment were: how long the business had operated, its management and type. The lenders characteristics that influenced loan repayment were: groups handled, period taken to qualify new members and the criteria used to evaluate credit worthiness. The study recommends that the government and other stakeholders in the finance sector should ensure that the borrowers have access to formal education and adequate relevant training in the business area. Furthermore, the mfis should aim at reducing the time it takes to process a loan application and develop models that are more effective in evaluating credit worthiness of their clients