NON-PERFORMING LOAN CHARACTERISTICS AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA

Catherine Muthoni Nyambu, Prof. Juma Maurice Ogada

Abstract


The potentiality of microfinance institutions to offer loan facilities to the unbanked population makes them important financial intermediaries. The financial success of microfinance organizations aids in the growth of the banking industry and the nation's economy as a whole. However, due to loan default experiences, its financial performance may be compromised, leading to its downward trend. As an example, the financial performance of MFB’s continues to plummet and fluctuate unpredictably despite having put in place measures to limit loan defaults as demonstrated over a five-year period spanning the years 2016 to 2020. As a result, it is uncertain whether non-performing loans significantly affects the financial performance of MFB’s. Non-performing loans of MFB’s realize a situation where either the principal or interest or both have not been honored beyond the due date and hence have a direct relationship with its financial performance.  Therefore, in light of this context, the study aimed at evaluating the effect of non-performing loan characteristics on the financial performance of microfinance institutions in Kenya. The study's particular goals were: To determine the effect of  cost per loan asset, and collateral provision on the financial performance of microfinance banks, Kenya. The study utilized Non-experimental research design. The target audience was 13 microfinance banks.   The study employed census survey since the population was small. The time scope of the study was five years from year 2016 to the year 2020. Secondary data of audited financial reports of microfinance banks was collected from MFB’S website, CMA and CBK reports using a data abstraction tool. Data analysis was done using panel linear regression analysis and multiple diagnostic test statistics. The data was presented using tables, graphs, and frequency tables. The results showed that the cost per loan asset had a statistically significant effect on financial performance, and the collateral had a statistically significant negative impact on financial performance of the company. The cost per loan asset and collateral null hypothesis tests were rejected because their p-values were less than 0.05, making them significant. The study recommends that managers of microfinance banks should ensure that the collateral value being attached to the loan is commensurate to the loan being advanced by the microfinance bank. This will confirm certainty of loan repayment by customers.

Key Words: Non-Performing Loan, Financial Performance, Microfinance Banks, Cost Per Loan Asset, Collateral


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