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 of this study was to find out the Determinants of Loan Repayment Default in Microfinance Banks in Kenya. A descriptive research Design was used to examine the factors that cause loan repayment default in Microfinance Banks in Kenya. The Target population was 13 Licensed Microfinance banks in Kenya. A Random Sampling procedure was used amongst the target population. One credit officer and one borrower 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. Data for the study was analyzed by use of Descriptive statistics. This involved the 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 study found that institutional characteristics had significant positive relationship with loan repayment default in microfinance banks in Kenya; borrowers’ characteristics had significant positive relationship with loan repayment default in microfinance banks in Kenya and loan characteristics had significant positive relationship with loan repayment default in microfinance banks in Kenya. The study therefore recommends that the credit offering institution 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. The interest rate that is being charged on loan is a major determinant of loan repayment rate it is therefore important for the institution charge interests that will enable the  borrower to service their loans as required.