The relationship between the use of the C's of credit and the non performing loans of micro finance institutions in Kenya
The Microfinance sector has in the recent past become a major player in the Kenyan economy. As such, for Microfinance institutions to sustain viable credit programmes, the criteria for assessing credit risk are essential so as minimize the loan default rates. One of the criteria for establishing the creditworthiness of a borrower is the C's of credit model. The two objectives of this study were:- • To establish the extent of use of the C's of credit risk appraisal model by MFls in Kenya • To establish the relationship between the use of the C's of credit risk appraisal model and the level of non performing loans of MFls in Kenya. To satisfy the objectives of the study, the data was collected from 15 Microfinance institutions using questionnaires. The data was analyzed by use of statistical package for social sciences (SPSS). The results have been presented in form of frequency tables, mean, standard deviation and percentages. The study also made use of regression analysis to establish the relationship between the use of the C's of credit risk appraisal model and the level of non performing loans. A t-test was carried out to measure the significance of the sensitivity of non-performing loans to the respective 6 C's. On assessing the significance of the respective coefficients, the study was able to deduce which of the 6 C's have a greater impact in determining the level of non-performing loans in Microfinance institutions. The findings of this study are that the C's of credit are essential in credit risk appraisal, and that the most critical factors of the C's are Capacity followed by Contribution and Character in that order. These findings are consistent with the assertions by Mwirigi (2006) who found that Capacity was the most considered factor followed by Contribution, then Character and Commonsense in credit risk appraisal by Microfinance institutions. This study further established that although Collateral is the most talked about among the C's of credit, it is the least important especially in lending to micro and small enterprises.