Effect of Joint Liability Lending Models on Loan Repayments Among Microfinance Institutions in Kenya
Abstract
The objective of this study was to establish the effect of joint liability (group) lending
model effect on loan repayment rates among microfinance institutions in Kenya.
Microfinance program is an effort to reduce poverty and improve life quality for the
poor and low income individuals. This program enables borrowers who do not have
any physical collateral but still can borrow small loans to realize their business ideas.
However, despite many positive achievements, microfinance still faces the challenge
regarding default risks.
The objectives were: to establish the causes of default in group lending; to establish
how screening and monitoring affects repayments rates; and to establish how
enforcement mechanisms affect repayment rates among micro finance institutions in
Kenya. The analytical techniques used were descriptive statistics in form of
percentages, inferential statistics, Pearson correlation, ANOVA and multiple
regression models.
The study found out that joint liability has a strong positive effect on loan repayment
because of social cohesion and better information flow. Joint liability lending
mechanisms were effective in ensuring timely repayments of funds, instilling
supervision and administration traits among the group members. The study concluded
that the group mechanisms should be upheld as they ensure increased probability of
repayment rates and leads to creation of customer loyalty. The findings further
indicated the positive impact of business training on repayment rate as the MFIs,
which offers business training to its clients, has had higher repayment rate and less
default than the with no training. In addition, the loan issued is secured by the cosignature
of members within the group and not by the microfinance institution. Each
member will put pressure on the others in the group to meet the loan repayment
schedule. Thus, group sanction is reducing defaults among members in microfinance
as all members of a group are jointly liable for default.
Citation
Degree of Masters of Science in FinancePublisher
University of Nairobi School of Business
Description
A research proposal submitted in partial
fulfillment of the requirement for the
award of the Degree of Masters of Science
in Finance, University of Nairobi.