Credit Risk Management And Loan Performance In Microfinance Banks In Kenya

ABSTRACT

The concept of micro-finance in Kenya is one of the most developed in the sub-Saharan Africa. As such there is much interest in the knowledge regarding sustainability of the continuous growth and development of this concept of financing. However, given the importance of credit risk in microfinance functioning, the efficiency of microfinance risk management which includes techniques, methods, processes, procedures, activities and incentives is expected to significantly influence its loan performance. This study therefore sought to determine the relationship between credit risk management and loan performance in microfinance banks in Kenya. Specifically, the study determined the relationship between credit risk environment setting and loan performance in Microfinance Banks in Kenya, established the relationship between credit appraisal process and loan performance, determined the relationship between credit administration, measurement and monitoring and loan performance and finally determined the relationship between internal controls over credit risk and loan performance in Microfinance Banks in Kenya. To undertake the study, a descriptive research design was adopted. The target population comprised the twelve microfinance banks registered by the CBK as at December 2015 and a sample size of sixty (60) respondents obtained by purposively sampling five respondents from each of the twelve microfinance bank. Data was collected through the use of questionnaires and analyzed using SPSS where descriptive and inferential statistics to determine the relationship between credit risk management variables and loan performance was conducted. From the study, 61% of the respondents were male, 46% were aged between 30-39 years with 81% having an education level of above a university degree and had worked in the microfinance banks for a period between 3-5 years. Findings further indicated that the senior management in the banks developing policies and procedures for identifying, measuring, monitoring and controlling credit risk was an important key credit risk environment aspect, microfinance bank having established overall credit limits both at individual borrowers and counterparties level was critical in credit appraisal process, the bank having a system for monitoring the condition of individual credits, including determining the adequacy of the provisions and reserves was important in credit administration, measurement and monitoring and finally the bank having an independent internal control system for conducting on going assessment of the bank’s credit risk management process was significant in internal control system in the banks. The study found that there was a positive statistically significant relationship between credit risk environment, credit appraisal process, credit administration, measurement and monitoring, internal control over credit risk and loan performance in the microfinance banks. The findings of the study provide additional insight to the various interested parties in the area of study including management of microfinance banks, regulatory authorities and investors in development of policy regulations that will enhance loan performance in Microfinance Banks.