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Cellinah Wanza Muindi - School of Business, Department of Accounting and Finance, Kenyatta University, Kenya

Nathan Mwenda Mutwiri - School of Business, Department of Accounting and Finance, Kenyatta University, Kenya


The unending demand for finances by low income earners and small businesses in the modern business environment coupled with stringent measures by commercial banks, has led to the emergence of microcredit offered by Microfinance Institutions (MFIs). They provide credit to borrowers aimed at promoting entrepreneurship and to alleviate poverty which is often hampered by lack of finances. However, their clientele often lack collateral, have low income levels, high leverage level, poor liquidity, and have little or no verifiable credit history. As a result, these institutions are often antagonised by high default rate. Empirical literature showed that MFIs in Kenya have experienced poor portfolio quality as indicated by the increasing Portfolio at Risk (PaR) over 30 days standing at 7% in 2012 progressively increasing to 16% in 2016 and 17.2% in 2018. This rate was much higher than the global average of 4.6% in 2012 to 4.7%, in 2015, 7.2% in 2016, and 7% in 2018. Since PaR over 30 days, is greater than the safe ceiling of 10%, it is clear that there is a concern for portfolio quality among MFIs in Kenya. The aim of the study was to determine the effect collateral requirements on portfolio quality of microfinance institutions in Kenya. The study was anchored on agency theory and modern portfolio theory. Survey research design was deployed on a population of 13 Microfinance banks in Kenya. Secondary data relating to a five year period ranging from year 2014 to 2018 was utilised. The data was collected through a secondary data collection sheet. Data analysis was conducted using descriptive statistics and inferential analysis with the aid of Statistical Packages for Social Sciences (SPSS). The study used R2 to explain variation in portfolio quality accessioned by variations in microcredit requirements. The F-statistic at 95% confidence level would determine significance in the relationship of the study variables. The decision on the significance of the study variables was based on P-values at 0.05 significance level. The study established that portfolio quality was inversely correlated with collateral requirements. Consequently, it was concluded that increasing operational assets, significantly lead to a decrease in portfolio quality of microfinance institutions in Kenya. The recommendation of the study was the management of microfinance institutions in Kenya should carefully determine and emphasise on operational assets, since they significantly affect portfolio quality of microfinance institutions in Kenya. Finally, the study suggests that other studies should be conducted to establish other determinants of portfolio quality among deposit taking and other non-deposit taking MFIs such as average profits, leverage level, and liquidity level.

Full Length Research (PDF Format)