Credit Appraisal Practices and Loan Performance of Deposit Taking Savings and Credit Cooperatives in Kiambu County, Kenya

Abstract

The Sacco sector play vital roles in the society by providing investment avenues, advancing credit facilities and instilling saving culture as well as enhancing financial access and inclusion. The subject of non-performing loans is increasingly becoming a challenge that jeopardizes the sustainability of deposit taking Saccos in Kenyan economy. The specific objectives were to: determine the effect of borrower's character, capacity, capital and collateral effect on loan performance in deposit taking saccos in Kiambu County. The research was anchored on asymmetric information, financial intermediation and credit scoring theories. The study used both primary data in form of structured questionnaire and secondary data on loan performance of deposit taking saccos. Annual financial statements of 14 registered deposit taking Saccos in Kiambu County were used to derive Secondary data. The target respondents were 56, which included: credit managers, finance managers and two credit officers from each firm. A census was done since the firms were not many.  Data analysis was performed using Statistical Package for Social Science through descriptive and regression analysis. The findings indicated that borrowers' character, capacity, collateral and capital had a positive and significant effect on loan performance. In particular, borrower's character was found to have the greatest effect on loan performance, followed by collateral, capacity and lastly capital. The results also revealed that credit appraisal practices account for 69% of total changes in loan performance among deposit taking saccos. The study concludes that improvement of credit appraisal practices including borrowers' character, capacity, collateral and capital is likely to enhance loan performance in deposit taking saccos operating in Kiambu County. The study recommends that the management of deposit taking saccos should follow stringent measures in analyzing borrower's profiles, occasionally review the capacity of a borrower to sustain loan repayment, periodically revalue collaterals to assess their net realizable value, and scrutinize the evidence of the borrower's capital contribution and also encourage borrowers to contribute more capital.