Effects of Institutional Factors on Credit Performance of Micro-Finance Institutions in Kenya; A Case Of Faulu Kenya Limited

Abstract

Despite aggregate growth in the microfinance sector, microfinance institutions (MFls) continue to face challenges in credit performance. The Central Bank of Kenya has not only been concerned over the low level of risk management in financial institutions, but also in the fact that most of these institutions concentrate only on credit risk, with weak measures in other credit management policies. Even though financial institutions are investing a lot of funds in credit risk modelling. it is not clear whether this investment is viable. Challenges with developing optimal appraisal, risk control, and debt collection policies persist, as well as their effect on credit performance. There is minimal research on the effect of institutional factors on credit performance. As such, research on the factors influencing credit performance is a matter of concern in practice and policy. The purpose of the study is to investigate the effect of institutional factors on credit performance. The specific objectives are to investigate the effect of client appraisal, credit risk control, debt collection policies on credit performance in Faulu Kenya. The study was guided by an adapted conceptual framework linking the independent variables and dependent variable. A descriptive crosssectional design was used to investigate the research questions. Random sampling was used to generate a sample size of 90 respondents. The questionnaire for data collection was pilottested and found to be satisfactory with a Cronbach's Alpha Reliability Coefficient of 0.844, which is above the recommended 0.7 threshold. Data was analyzed using descriptive statistics and inferential statistics. Descriptive results indicate a high level of importance placed on credit appraisal, credit risk control, and debt collection strategic . Multiple regression coefficients indicate that the relationship between credit appraisal policy (p=0.143) and credit performance; an inverse relationship between credit risk control policy (p=0.246) and credit performance, and a positive and statistically significant relationship between debt collection policies and credit performance (p=O.OOO)at 95% significance level. The study concludes that MFls should emphasize on debt collection policies in order to improve credit performance.