Socio-Economic Aspects That Affect Loan Repayment In Selected Micro Finance Institutions In Kenya

ABSTRACT

Microfinance institutions (MFIs) were established to fill the gap in the financial services sector by providing funds to the poor and lower income group and thus alleviating poverty and enhance their business activities. In the credit market, agency problem, moral hazard and adverse selection exist because of information asymmetries. Information asymmetries are the main obstacle for MFIs to provide loans to clients. This study sought to analyze socio-economic issues that affect loan repayment in micro finance institutions Kenya. Some of the socio-economic factors that were examined include the borrowers’ income level, education qualification, age of the borrower and family size. Being a quantitative study, descriptive research design will be adopted. The study population was 66 staff of Kenya Women Finance Trust microfinance who consists of the senior managers and the loan/credit officers in six branches within Nairobi. Since the population is small, a census study was adopted hence all the 66 staff formed the sample size for the study. The study collected primary data through a questionnaire which had both closed and open-ended questions. A pilot test of the instrument was conducted to test for reliability and validity. The researcher personally administered the questionnaire to the respondents. Both descriptive and inferential statistics was adopted for the study. Descriptive statistics included frequency distribution tables and measures of central tendency, measures of variability and measures of relative frequencies. The inferential statistics included a multivariate linear regression model which established the relationship between variables. Data was presented using tables, pie charts and bar graphs. The study found that majority of the respondents indicated they considered the borrowers’ income when advancing loans in their institution. Further majority of the respondents indicated those clients below Kshs. 10,000 income level were likely to default. The study also found that majority of the respondents indicated their institution considers the borrowers’ education level when advancing loans to individual borrowers. The study also established that majority of the respondents indicated they did not consider the age of the borrower when advancing loans to individual borrowers. The study also concludes that the number of income sources of the borrower determines his/her ability to repay a loan and also the borrowers’ source of income. The study concludes that the number of dependants affects borrowers’ repayment of loans and the household expenses affect borrower’s ability to repay loans. In addition the income of the borrower affects loan repayment in their organization to great extent. In a nutshell the study concluded that socio-economic factors affect borrowers’ timeliness to repay loans. The study recommends that; this study recommends that micro finance institutions should revise the term and conditions attached to loan so that they can reduce the loan repayment problems associated with socio-economic factors and also that financial institutions should develop appropriate mechanisms to ensure that loans are repaid within the specified time period. This is because poor loan repayment can affect the future access to finances from financial institutions.