Effect of Credit Monitoring Practices on Loan Nonperformance among Microfinance Institutions in Nairobi County, Kenya

Abstract

The Kenyan microfinance industry faces many challenges. Studies point to nonperforming loans as one of the main problems facing microfinance institutions in Kenya, which has led to reduced profitability and institutional collapse in some cases. Noncompliance with credit monitoring and loan policy provisions have been cited as some of the factors leading to increased non-performing loans. The main objective was to determine the effect of Credit Monitoring on nonperforming loans among microfinance institutions in Nairobi County. Information Asymmetry theory guided the study. The study’s main goal was to assess how credit management methods in Nairobi County’s microfinance institutions influence the amount of non-performing loans. The study employed correlation research design where a quantitative approach was adopted. Stratified proportionate random sampling was adopted where data was obtained from 48 microfinance institutions in Nairobi County. The population constituted 192 respondents comprising general managers, credit managers, finance officers, and accountants. The study sampled 128 staff who responded to questionnaires designed on a 5-point Likert scale. Data were subjected to analysis by use of SPSS, where correlation demonstrated possible relationships of variables while regression predicted the effects of changing variables on the defaulted loans. The study found that there was a positive significant effect of credit monitoring practice (β=-0.498, t=-5.099, p< 0.05). The null hypotheses were rejected and alternative hypotheses were accepted that credit monitoring practice had a significant influence on loan nonperformance among microfinance entities in Nairobi County, Kenya. Based on the findings of the study, the researcher recommends that microfinance entities should strengthen credit-monitoring practices to minimize debt writing off and loan nonperformance.