The Effect of Credit Policy on the Financial Performance of Microfinance Institutions in Nairobi County

Abstract

The research was carried out on the effect of credit policy on financial performance of microfinance institutions in Nairobi County. Microfinance institutions take cash from customers in form of deposits and in turn give out to customers as loans but sometimes clients are unable to pay their loans raising the issue of nonperforming loans. Establishing the effect of the policy of credit on financial performance of microfinance institutions was the main objective of the research. Establishment of a common set of standards, provisioning and classifying of loans, application of a common language and methods for measuring and reporting non-performing loans and prudently overseeing quality of assets can be achieved through a good credit policy. Success largely depends on the performance of the borrower because funding risk is found in every activity. This risk occurs the moment an extension, exposure, investment or commitment of bank resources are used directly or indirectly to contracts, whether shown on or off the income with Central bank of Kenya and Association of Microfinance Institutions of Kenya. Full data was obtained from 13 Micro Finance Institutions for the year 2012 to 2014. The research concentrated to 13 Micro Finance Institutions. The data collected included: Earnings before Interest and Taxes, Total Net Assets, Cost per Loan Assets, Non-performing Loans, and Total Loans. The data collected was analyzed using analyses of correlation and regressing multiples to find out the degree up to how much credit policy influence financial performance of Micro finance Institutions in Nairobi. The findings revealed that there was a significant relationship between financial performance of Micro Finance Institutions and credit standards, credit terms and conditions, and collection effort with R ranging from 0,498 to 0.235. From the findings it was established that credit standards, credit terms and conditions, and collection efforts affect the financial performance by a relatively moderate per cent. The management must be keen not to set up a policy of credit that can negatively affect the profits of the institution was the main study recommendation.