The Dichotomy of Risk and Loan Repayment: Which Way Microfinance Banks?

Abstract

Repayment of disbursed loans to borrowers remains the central focus of every lending financial institution. Microfinance banks (MFBs) are vehicles of financial inclusion designed to onboard the unbanked majority, especially in developing countries. However, the transition drags along with it worrying default trends that threaten to overturn the gains of this concept. Reports indicate that of 45% of default borrowers in the USA, 60% terminate into bad debts. The statistics in Nigeria depict growing non-performing loans. The loan repayment trend among MFBs reflects a trajectory that calls for urgent intervention measures to secure steady operations to the extent of meeting their arising financial obligations. Existing empirical studies were biased in favour of credit risk and left the mitigation perspective of its management, which serves to diagnose and neutralize potential adverse lending outcomes. Extant literature is dedicated to investigating parameters associated with profitability. The main objective of this study was to investigate the relationship between credit risk management and loan repayment among microfinance banks in Kenya. Credit risk and moral hazard theories underpinned the study. Secondary balanced panel data for eight years, sourced from the annual reports of 12 regulated MFBs in Kenya, was used. Moderated multiple regression was applied to realize the study objective and results indicated that credit risk management yields a negative but significant change in loan repayment (β=-0.009874, p=0.0260). This implies that a unit increase in the credit risk management ratio leads to an inverse but significant -0.98% decrease in loan repayment. Based on this finding, it is recommended that efforts to enforce a reduction in non-performing loans should coincide with measures to filter the profile of loan applicants to eliminate borrowers with tainted credit history.