Determinants of repayment of group loans amongst microfinance institutions in Nakuru county, Nakuru town, Kenya

Abstract

There has been significant growth in the recent years of MFIs which offer financial services to people who are financially excluded by main stream financial institutions. The MFIs therefore use group lending methodology to replace the need of collateral in forms of land or log books with social collaterals. However, despite the advantages associated with group lending, challenges do exist that impact on loan repayment performance of groups. This study seeks to examine the determinants of repayment performance of group loans amongst MFIs in Nakuru town. In this context, the study examined the role of business skills of group members, joint liability of group members, loan repayment terms, and demographic factors of group members on loan repayment. The study was based on the moral hazard and credit rationing theories. The descriptive research design was used for this study. The target population of this study was the group members of the groups that have borrowed from MFIs within Nakuru town. The target population of this study is 2280 groups that have undertaken borrowing from MFIs in Nakuru. A sample size of 96 respondents was derived using Nassiuma’s (2009) formula. The structured questionnaire was used for the purposes of data collection. The pilot study was therefore undertaken amongst groups in MFIs in Gilgil using 10 respondents which constitute 10% of the sample size. The content validity of the study was examined using the experts of MFIs which constituted of the university based lecturers as well as industry practitioners. A cronbach alpha coefficient of 0.7 and above was used for the study. Both the descriptive and inferential statistics were used for the study. The descriptive statistics that were utilized include frequency distributions, means, standard deviations, and correlations. The inferential statistics that were undertaken include the one way ANOVA and the regression analysis. The regression analysis examined whether an independent variable predicts a given dependent variable. The study concluded that business skills, joint liability, and loan repayment terms didn’t have statistically significant influence on their own compared to demographic factors that had significant influence on the loan repayment on its own. In the context of the ranking of the levels of influence amongst the independent variables, demographic factors was the most influential independent variable on the dependent variable followed by loan repayment terms, business skills and joint liability factors. The study recommended that record keeping, group social ties and frequency of payments should be emphasized in order to improve on the loan repayment level.