Relationship between credit scoring practices and the level of non-performing loans of deposit taking micro finance institutions in Kenya

Abstract

Extension of credit facilities is one of the major activities of Deposit Taking Microfinance institutions. This is usually evidenced by the large proportion that loans constitute in the overall operating assets of these lending institutions. However, lending activities have been controversial and a difficult matter. This is because business firms are complaining about lack of credits and the excessively high standards set by financial institutions, while financial institutions on the other hand have suffered large losses on bad loans. In order to raise the quality of giving loans and reduce the risk involve in giving loans, credit scoring models have been developed by banks and researchers to improve the process of assessing credit worthiness during the credit evaluation process. The purpose of this study was to investigate the relationship between credit scoring practices and the level of non-performing loans of Deposit Taking Microfinance institutions in Kenya. The study used a descriptive survey approach in collecting data from the respondents. Census survey of all 8 licensed Deposit Taking Microfinance institutions in Kenya was carried out. From the findings, the study concludes that Deposit Taking Microfinance institutions in Kenya adopted credit scoring approaches in screening and analyzing risk before awarding credit to clients to minimize loan loss. The study further concludes that there was a negative relationship between credit scoring practices and the level of non-performing loans of Deposit taking microfinance institutions.