Macroeconomic Factors and Non-performing Loans Among Deposit Taking Micro-finance Institutions in Kenya

Abstract

Lenders and borrowers play a vital role in the growth of economies by moving capital from organizations or businesses that have surplus money to entities that have shortage of funds then to customers. However, high NPLs often lead to financial crisis and ultimately failure of financial institutions. The MFIs in Kenya also suffer from challenges related to management of credit risks leading to accumulation of NPLs and agency problem between creditor and debtors. Most of literature on NPL in Kenya has not considered the role of macroeconomic variables on NPLs in MFIs. This led to the current research which sought to estimate the influence of macroeconomic variables on NPLs in Kenyan deposit taking MFIs. The study focused on the principal-agent theory, theory of information asymmetry, and modern portfolio theory. The present study was premised on descriptive survey approach. The study was a census of all the 13 licenced MFIs based on a ten (10) year period. All the data collected was secondary and quantitative. Descriptive and inferential statistics were applied in analysis of data. The findings have indicated that inflation, interest rates, and unemployment rate affect NPL negatively. In addition, exchange rate was found to have a statistically positive influence towards nonperforming loans. On other hand, GDP was reported to have an insignificant effect on NPL. The study therefore concluded that macroeconomic factors influence nonperforming loans in MFIs. It was then recommended that the central bank should consider viable ways of regulating the macroeconomic factors to ensure availability of loans on reasonable terms.