Credit policy and financial performance of microfinance institutions in kenya

Abstract

This study was carried out with the purpose of establishing the relationship between credit policy and financial performance of microfinance institutions in Kenya. Credit policy is an important activity within any financial institution that cannot be overlooked in an economic organization engaged in credit irrespective of the nature of business. A well-structured credit policy is a prerequisite that is able to define the stability and continued profitability, while a poor formulated credit policy could cause a negative financial performance for any financial institution. This financial performance constitutes the risk of lending out money and not being able to get it back. The study adopted a survey design, regression analysis to determine the relationship between variables of the study. Frequency distribution tables and percentages were used to examine the institutions branch coverage, credit terms, financial performance, credit approach, organization membership and challenges faced in practicing credit policy. The findings revealed a positive relationship between financial performance, credit policy, credit risk controls, credit appraisal and collection policy. Credit policy was a significant predictor showing that when credit appraisal and credit policy procedures on risk management are competent, they can influence achievement of improved financial performance objective. The study recommends that microfinance institutions should adopt a more stringent policy to a lenient policy for effective debt recovery.