EFFECT OF CREDIT RISK MANAGEMENT PRACTICES ON LOAN PERFORMANCE OF MICROFINANCE BANKS IN KENYA
EFFECT OF CREDIT RISK MANAGEMENT PRACTICES ON LOAN PERFORMANCE OF MICROFINANCE BANKS IN KENYA
Mercy Chepkoech Mutai - School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Gordon Opuodho - School of Business, Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Microfinance banks Kenya are experiencing continuous increase in Non-performing loans (NPLs), despite them having embraced strategies for risk management. The general objective of the study was to establish the effect of credit risk management practices on loan performance of microfinance banks in Kenya. Specific objectives were to establish the effect of internal credit risk policy practices, credit granting process practices, credit monitoring practices and credit controls practices on loan performance of Micro Finance banks in Kenya. The study adopted a descriptive cross-sectional survey. The study population composed of the 12 microfinance banks in Kenya, with 183 members of staff at currently working at the head office of microfinance banks in Kenya. The researcher used purposive sampling to reduce standard error by proving some control over variance. Using Slovin's Formula, the sample size was 126 respondents. The questionnaire was selected tool for data collection. Quantitative data collected was analyzed by the use of descriptive statistics. Content analysis was used to test data that is qualitative in nature or aspect of the data collected from the open ended questions. The study conducted a correlation analysis to establish the strength of the relationship between the independent and the dependent variables. Multiple regressions were done to establish the effect of credit risk management practices on loan performance of microfinance banks in Kenya. The study found that the variables internal credit risk policy practices, credit granting process practices, credit monitoring practices and credit control practices positively and significantly influence loan performance of microfinance banks in Kenya. The study therefore recommends financial institutions to embrace a system for managing credit risk so as to guide them in enhancing and improving profitability. Also, Microfinance banks should charge interest rates that are affordable that will draw more creditors and therefore increase the revenue from earned interests. Microfinance Banks should enhance their credit scoring and administration practices to ensure that their financial performance improves. In addition, financial institutions should focus more on the credit policies of the regulatory authority.
