Factors Influencing Non-performing Loans of Microfinance Institutions in Kenya

Abstract

The success of MFIs largely depend on the effectiveness of their credit management systems because these institutions generate most of their income from interest earned on loans extended to small and medium entrepreneurs. The Central Bank Annual Supervision Report, 2010 indicated high incidence of credit risk reflected in the rising levels of non- performing loans by the MFI‟s in the last 10 years, a situation that has adversely impacted on their profitability. This trend not only threatens the viability and sustainability of the MFI‟s but also hinders the achievement of the goals for which they were intended which are to provide credit to the rural unbanked population and bridge the financing gap in the mainstream financial sector. This study sought to find out the factors that influence non-performing loans of microfinance institutions in Kenya. This research study adopted a descriptive survey approach on the factors that determine non-performing loans of microfinance institutions in Kenya. This study targeted all the 52 MFI‟s in Kenya. This study used primary and secondary data. Primary data was collected by way of structured and semi structured questionnaires with both open and closed ended questions. This was done on the credit managers/officers. The data was analyzed by use of summary statistics, including percentages, means and standard deviation to measure interrelationships between the variables. Graphs were also used to display the information to improve presentation of the analyzed results for ease of interpretation. The SPSS version 17 and MS excel was also used to analyze the collected data. The study concluded that Institutional characteristics contribute most to the non-performing loans of microfinance institutions in Kenya followed by Macroeconomic variables and finally Customer characteristics. At 5% level of significance and 95% level of confidence, institutional characteristics (β=0.852, t=6.569, p=0.00), customer characteristics (β=0.578, t=4.117, p=0.00), and macroeconomic variables (β=0.654, t=3.968, p=0.00) were all found to be significant in influencing non-performing loans of microfinance institutions in Kenya. Microfinance Institutions in Kenya should put in place a vibrant credit process that would encompass issues of proper customer selection, robust credit analysis, authentic sanctioning process, proactive monitoring and follow up and clear recovery strategies for sick loans.