Effects of Credit Policy on the Financial Performance of Development Finance Institutions in Kenya

Abstract

Development Finance Institutions have been in existence in Kenya since the 1950’s. The performance of the institutions and achievement of the main objectives of the institutions has been seen to be on a decline with researchers arguing that DFI’s have come of age and their objectives should be re-evaluated. The institutions however remain relevant especially in developing countries where there is still need to build on the core industries of the economy. Economies have been seen to grow where governments invest in Small and Medium-sized Enterprises. This is mainly done through loan funding to entrepreneurs who invest in sectors that enhance economic growth. The effectiveness of lending in DFI’s however remain unexamined. The aim of this paper is therefore to establish the effects of credit policy on the financial performance of Development Finance Institutions in Kenya. The study is of benefit to these finance institutions and loan seekers to make optimal decisions when choosing a source of finance and to the future researchers who will need information on credit policy and financial performance. The study adopted exploratory and descriptive survey research to identify the effects of credit policy on performance of DFI’s. Five Development Finance Institutions in Kenya were studied. These are Industrial and Commercial Development Corporation (ICDC), Kenya Industrial Estates (KIE), Agricultural Finance Corporation (AFC), Industrial Development Bank Capital Limited (IDB) and Tourism Finance Corporation (TFC). The data was collected from credit risk managers of the various institutions. This is because they have the hands on knowledge on all credit policies in the institutions. Secondary sources for a period of 10 years - (2005-2015) was used. Accordingly, data analysis was based on the secondary data collected in this study. SPSS and Excel programs were used in cleaning the data and running the analysis. Descriptive statistics was undertaken then correlation and regression analysis. Based on the regression model predicted 85.5% of the total variation in ROA as indicated by R square. This implies that the model can be used to predict 85.5% ROA while 14.5% is explained by other factors. The coefficient analysis found out that credit terms and collection efforts had negative contribution to ROA. However, their effect was insignificant. Credit standards and capital adequacy had a positive and significant effect on ROA at 95% confidence level. The study therefore, concluded that, credit policy has significant effect on financial performance. It was recommended that the management of these institutions should develop sound credit policies, which will help the institutions foster an increased financial performance. Further study can be done to determine the implementation process and challenges faced in implementing credit policies in development finance institutions.