CREDIT RISK MANAGEMENT PRACTICES AND ASSET QUALITY OF DEPOSIT TAKING MICROFINANCE INSTITUTIONS IN KENYA
CREDIT RISK MANAGEMENT PRACTICES AND ASSET QUALITY OF DEPOSIT TAKING MICROFINANCE INSTITUTIONS IN KENYA
Mariita Ontita Kevin - Postgraduate Student, Department of Accounting and Finance, Kenyatta University, Kenya
Dr. Anthony Irungu, (Ph.D) - Lecturer, Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
Deposit Taking Microfinance Institutions in Kenya faces insistent challenges in realizing sound asset quality, with non-performing loans eroding institutional stability and threatening long-run viability. This research determined the effect of credit risk management practices on the asset quality of Kenyan Deposit Taking Microfinance Institutions, concentrating on credit risk identification, credit risk assessment, credit risk monitoring, and credit risk control practices. The research was done on the period between 2019 and 2024 and underpinned on the Asymmetric Information Theory, Credit Rationing Theory, Modern Portfolio Theory, and Agency Theory. A descriptive research method was employed, targeting operations managers, credit managers, and risk managers drawn from all thirteen licensed DTMFIs in Kenya. The research employed both primary and secondary data. Primary data was acquired through structured questionnaires whilst secondary data gathered utilizing data gatherin sheets. Diagnostic tests including Normality Test and Multicollinearity Test were done to ensure robustness of the regression model. Data were analysed utilizing SPSS, for both descriptive and inferential statistics. Descriptive statistics adopted frequencies, means, and standard deviations, whereas inferential analysis included Pearson’s correlation and panel regression techniques. The regression analysis indicated that credit risk identification, credit risk assessment, and credit risk monitoring had statistically positive significant effect on asset quality, concluding that structured screening, rigorous assessment, and continuous monitoring enhance portfolio stability and reduce non-performing loans. Similarly, credit risk control practices had an adverse significant effect on asset quality. The research concluded that effective credit risk identification, assessment, and monitoring practices were core in sustainment of asset quality in Deposit Taking Microfinance Institutions, whereas extreme dependence on rigid control mechanisms undermined Deposit Taking Microfinance Institutions success. The research recommended that Deposit Taking Microfinance Institutions should embrace proactive and technology-driven risk identification and monitoring tools, strengthening borrower appraisal frameworks, and complement enforcement with adaptive strategies such as flexible loan repayment arrangements and financial literacy initiatives. Regulators should also improve supervisory monitoring and promote the integration of predictive analytics to ensure financial stability in the sector. The research adhered to all ethical deliberations by obtaining research license and respondent consents.
