| dc.description.abstract | Microfinance, the provision of financial services to poor people holds enormous potential to
support economic activities and thus contribute to the alleviation of poverty Widespread
experiences and research have particularly shown the importance of savings facilities for the
poor. Micro credit systems have been developed in response to the needs of small-scale
entrepreneurs who otherwise do not have access to finance. To be able to continue giving credit,
borrowers from MFIs and commercial bank offering micro-credit products should repay as
agreed and on time. Successful and effective credit risk appraisal and evaluation determines the
success of the credit journey. An established credit risk management process ensures that this
journey succeeds.
The study focuses on the credit risk management techniques that have been adopted by MFIs and
banks offering micro-credit products with objective of assessing the techniques.
To satisfy the objective of the study, primary data was collected, by use of a questionnaire from
25 MFIs and 6 banks offering micro credit. The primary data was supplemented by information
obtained from brochures and direct interviews to clarify answers on the questionnaires. The data
was analyzed by use of statistical package for social sciences (SPSS) that is used internationally
for statistical analysis. The results have been presented in form of frequency tables, graphs and
percentages.
The findings of this study are that a significant number of 92.5% (37 out of 40 respondents) have
credit risk management policies as a basis for objective credit risk appraisal and that they
involved their employees in developing the credit risk management policies. Most of the
institutions used the credit manual to sensitize their employees about credit risk management. It
was also found that most institutions have distinctive separate departments where micro credit
activities are organized, an indication of growth in the development of micro credit institutions in
the country. It was also found that most of the institutions work with pre-set targets that are
closely monitored and that micro credit departments had specific credit officers. Further, the
study found that a majority of the institutions that as early as one late repayment, a loanee was
considered a defaulter and thus collection efforts were intensified. This partly explains why
microfinance institutions command low default rates. On dealing with difficult-to-repay-on-time
clients, the study found that most indicated the preferred method was sale of property to recover
the money, followed by write-off of the balance while others would consider writing off the
interest and allowing defaulters to repay the principal loan only. Further, most of the institutions
used the 6 C's criteria and that capacity/completion was the most important factor followed by
contribution and character, and reasonableness (common sense) of cash flows from business.
This finding is not consistent with assertions by Mutwiri (2003) who found that character was
the most considered followed by capacity/completion and common sense/reasonableness, in
commercial banks.
Further, the study established that the most important risk that they face was credit risk followed
by interest rate risk and technological risk, and that they used swaps followed by forwards,
futures and lastly options to manage the risks. This finding is consistent with Abedi (2000) who
found that liquidity risk and credit risk are the most important risks that banks in the U.S.A. face. | en |
