Determinants of Loan Repayment Defaults in Microfinance Banks in Kenya

Abstract

The Monitoring and effective controlling of non-performing advances is of crucial importance to any Microfinance Bank financial performance and the economy’s financial environment. The future is always uncertain and there is a credit risk associated with loans advances to borrowers which can lead to financial Crisis/distress in the institutions. Loan Repayment default can be voluntary or involuntary and it can lead to Lenders additional cost which include loan recovery costs and Cost of refinancing. The objective was to investigating the Determinants of Loan Repayment Default in Microfinance Banks in Kenya. In order to examine the factors that cause loan repayment default in Microfinance Banks in Kenya, descriptive Research design was applied. The Target population was 13 Licensed Microfinance banks in Kenya. A Random Sampling procedure was used amongst the target population. Two credit officers and two borrowers were randomly selected from each of the 13 MFB. The sample size was 26 credit Officers and 26 borrowers with a total of 52 Individuals. The Researcher used primary data which was obtained from credit officers and borrowers by administering of questionnaires. Analysis for the study data was done by use of descriptive statistics which made use of percentages, mean, median and frequency tables to present the data. SPSS and a regression model were employed to analyze the data. Loan Repayment default was the dependent variable, while Borrower characteristics, institutional factors and the Loan characteristics were the independent variables. The Findings of the study indicated that there was a significant positive relationship between institutional characteristics, borrowers’ characteristics, the loan specific factors with loan repayment default in microfinance banks in Kenya. From the study it’s recommended that the credit offering institutions should train their credit officers so that they can be competent and thorough when conducting credit appraisal. This will ensure that the institution advances credit to those borrowers who have the ability to pay back and therefore reducing the rate of loan non-repayment. It is important for the management to conduct a thorough and in depth appraisal of the borrowers before advancing credit to them this will reduce the rate of loan defaulting.