Modelling the relationship and impact of the factors affecting loan default among small, micro and medium enterprises

Abstract

Small businesses have been cited as major players in economic development in Kenya. As is the case in other developing countries, securing financing and loan repayments remains a challenge in this group of enterprises. This research analysed loan repayment and credit management of Small, Micro and Medium Enterprises in a Kenyan financial institution. Several factors were analysed to determine their relationship and impact on default. These factors included age, period and type of relationship of the customer with the bank (personal, business, old or new to bank customers), loan amount, loan term, loanproduct, gender, repayment amount, other borrowing, net income, marital status, interest rate and level of education. The response variable which is default can either take a “yes” or a “no” which is binary nature. The binary Logit model was therefore used to assess the relationship and impact of the determinant factors affecting loan repayment. The study analysed 1000 loans granted to small business owners by a Kenyan commercial bank. Net income, loan repayment period, interest rate and repayment amount were found to be stiatically significant and were the major factors that influenced default.