Effect of Credit Processes on Financial Performance of Microfinance Institutions in Kenya

Abstract

Micro-finance institutions are important in banking the low-income earners and advancing credit facilities that enable them to improve their living standards. These institutions help to develop individuals and businesses owned by low income earners especially in third-world countries. However, their financial performance is deterred by the problems of ineffective financial management leading to loss of interest income. According to bank supervision report of the year 2016, loss of loan interest income was detrimental to achievement of profitability goals among micro financial organizations. Due to this situation, there was a need to assess financial performance from angle of processes involved in advancing and repaying loans. The objectives of the study were on aspects of monitoring process of loans, loan appraisal processes and loan policy. Theories reviewed included; agency theory and information asymmetry theory. The researcher used descriptive survey research design targeting the Managing directors, Finance Managers and credit risk managers. Census technique was used to include all the 30 respondents into the study. Data was collected through questionnaire and analyzed using descriptive statistical methods (mainly frequencies and percentages) and inferential statistical techniques (Correlation and regression analysis). The results revealed that the firms ensured that the borrower understood the current payment process of the loan. Similarly, the firm considered the economic conditions before giving loans. The findings also revealed that the firm monitored interest rates behavior and also that the firms monitored central banks conditions on loans. The study recommended that microfinance institutions in Kenya should make the clients understand the loan acquisition and payment processes. The microfinance institutions gave considerations to the economic conditions before giving loans. The study made suggestions for further studies to be undertaken on factors affecting credit policy implementation in lending institutions.