Financial Management Tools And Loan Performance Of Micro Finance Institutions In Starehe Constituency, Nairobi City County, Kenya

ABSTRACT

The Central Bank of Kenya annual supervision report, 2018 showed there has been low performance incidence of MFIs attributed to factors such as the rising levels of nonperforming loans measured as a percentage of gross non-performing loan divided by net advances to customers from 7% in 2011 to 16% in 2016, a situation that has adversely impacted on their profitability which as per the CBK year 2018 supervisory report indicated a 447 percent increase in reported loss of Kes 935.1million for period ending June 2018 . There has been an increased rate of defaults, coupled with diminished number of borrowers. Microfinance institutions in Starehe Sub County that serve retail customers encounter specific challenges like financial vetting of their clientele to risk exposure which cannot be solved with bank solutions; the performance has not met the expectations. This attracts further investigation in order to understand financial issues in the sector and therefore this study seeks to examine the effects of financial management tools on loan performance in microfinance institutions in the Starehe constituency Nairobi City County, Kenya. The study was guided by the following objectives: To examine effect of accounting information systems on loan performance among microfinance institutions in Starehe constituency, Identify the effect of working capital management on loan performance among microfinance institutions in Starehe constituency, find out effect of financial reporting analysis on loan performance among microfinance institutions in Starehe constituency and to examine the effect of fixed asset management on loan performance among microfinance institutions in Starehe constituency. It utilized three theories: Agency theory, expectancy theory and trade-off theory of capital structure in explaining relationship between financial management tools and performance of loan among the selected MFIs in Nairobi. Descriptive research design was adopted in this study and this approach analyzed both quantitative and qualitative data from interviewing the respondents. Stratified purposive sampling was used to select a sample of 86 out of the target population of 109. In collecting the data, this study utilized questionnaire which was administered by the researcher and a team of research assistants. Data analysis was conducted and Statistical Package for Social Sciences (SPSS) version 23.0 used to analyze data. Data was presented in descriptive and frequency tables and graphs, and the study adhered to ethical principles of research. The study findings revealed that, there is significance relationship between financial management tools and loan performance in microfinance institutions in Kenya. The study recommended for microfinance institutions to train their managers on importance of financial management tools on loan performance to improve their loan performance. The study further recommend for critical evaluation of potential borrowers concerning their credit worthiness before offering loans to them to minimize non-performing loans.