Credit Risk Management and Loan Performance of Non Deposit Taking Microfinance Institutions in Kenya

Abstract

Credit risk management is a key ingredient in management of loan portfolios among financial institutions because it minimizes losses and guarantees acceptable level of returns for the shareholders. Since microfinance institutions provide loans to the poor who may not access loan from banks, credit risk management practices is fundamental to loan performance among microfinance institutions in Kenya. This study assessed the influence of credit risk management strategy on financial performance of the non-deposit taking microfinance institutions in Kenya. The study was guided by Information Symmetry, Adverse selection and the Moral Hazard Theories. Descriptive survey research design was adopted for the study whose target population comprised branch managers of all the registered microfinance institutions in Kirinyaga County of Kenya. Data was collected using structured questionnaires administered through drop and pick method and analyzed the data using Statistical Package for Social Sciences. Descriptive statistical namely means, median, mode and standard deviation while inferential statistics was performed by estimating the specified regression model using t-test and F-test statistics. Results were presented using tables, pie charts, cross tabulations, correlations and figures. All the parameters of Credit risk management were positive and statistically significant on loan performance among non-deposit taking microfinance institutions. Management of microfinance institutions should strengthen their credit risk management strategies in order to maintain healthy loan performance and boost organizational financial performance.