The Microfinance Institutions (MFIs) lend small amounts of unsecured loans to poor clients which signify their objectives of improving the social status of the poor while also trying to maximize their returns. Yet, lending by MFIs is a risky venture especially in developing countries because of the susceptibility of their poor clients. This study therefore determined the extent at which strategic credit risk management affect growth of MFIs in the Eldoret Municipality, Kenya. This study used probability clustered random sampling of 12 MFIs in Eldoret municipality to collect primary data and various reports and published work on MFIs between 2010 to 2015 formed the basis of secondary data. The effect of loan default, risk coverage and credit policy on growth of MFIs was measured by profit and outreach respectively. The relationship between of loan default, risk coverage and credit policy and growth was measured using multiple linear regression models. Hausmann test of endogeneity was employed to validate the results. We demonstrate that profit was significantly (p < 0.05) positively correlated with credit policy but negatively correlated with default and risk coverage. Meanwhile outreach showed a significant (p < 0.05) negative correlation with loan default and risk coverage but no relationship with credit policy. Thus credit risk was an obstacle to the sustainable growth of MFIs in both profit and breadth of outreach. As a result proactive strategies like enhanced management information system, effective internal control and redesigning of suitable customers’ oriented products should be considered.
Table of Contents
1. Introduction
2. Methodology
2.1. Description of Study Area
2.2. Method and Sources of Data Collection
2.3. Data Analysis
3. Result and Discussion
4. Conclusion and Recommendation
Research Objectives and Themes
The primary objective of this research is to evaluate the impact of strategic credit risk management on the growth and sustainability of microfinance institutions (MFIs) within the Eldoret Municipality, Kenya. The study examines how credit risk variables influence institutional profitability and the reach of financial services to vulnerable populations.
- Analysis of the relationship between loan default and institutional growth.
- Evaluation of risk coverage strategies and their effect on MFI profit margins.
- Assessment of credit policy culture as a driver for outreach and sustainability.
- Identification of barriers to financial accessibility for low-income segments.
- Proposal of proactive management strategies to mitigate credit risk in microfinance.
Excerpt from the Book
1. Introduction
Business enterprises operate to maximize their profits as they aspire to minimize loses [1]. Many financial institutions such as banks, non-banks and organizations lend to customers focusing on making profits through the interest charged on the borrowed capital. Since many lower income borrowers are viewed to repay less nominal interests and therefore very little profit to the financial institutions, there is always a tendency to neglect their welfare needs of the lower income brackets [2]. This has witnessed the scenes of conservative banks and/or formal financial institutions to leave out the low income brackets from accessing loan facilities [3]. Several researchers have pointed out that the main reasons why the low income borrowers are excluded include: absence of credit history which banks will use as primary data for lending, lack of any collateral, especially land, to compensate in case of default and lastly it is difficult to determine the credit worthiness of these poor people since they deal with little amounts of money making it also very tedious to monitor them [4].
In 2015, about 10% of the people lived below the poverty line defined as living on less than US$ 1.90 a day [5]. Most of the poor people always living below the poverty line and in some instance extreme poor people live in the Sub Saharan Africa [SSA) [5]. In fact the population living below the poverty line in SSA is more than all the other regions combined. Recently most of the rural population has been migrating to the urban areas, not only increasing the urban population but also the urban poverty [6-9]. IN the past majority of the rural dwellers were poor, uneducated, with mostly employed in the agricultural sector. In urban areas of SSA, the situation is not different only that there are very few employed in the agricultural sector, but most find some form of jobs in the informal sector such as in the Micro and Small Enterprises (MSEs). (MSEs) that is more widespread in many urban areas in the SSA [9-12]. Yet for many of the entrepreneurs in the small business segments, accessing finance among the poor is becoming a fundamental challenge [12-14].
Summary of Chapters
1. Introduction: This chapter highlights the challenges of financial exclusion for low-income populations and introduces the research focus on credit risk management within Microfinance Institutions.
2. Methodology: This section details the research design, which combines qualitative and quantitative data collection methods, and outlines the panel data regression models used to analyze credit risk variables.
3. Result and Discussion: This chapter presents empirical findings, demonstrating that risk coverage and loan defaults negatively impact profits, while credit policy culture positively correlates with institutional growth.
4. Conclusion and Recommendation: This chapter synthesizes the study findings and suggests proactive strategies, such as improved management information systems and flexible loan product design, to enhance MFI sustainability.
Keywords
microfinance, financial inaccessibility, joint liability, outreach, credit risk, credit policy culture, loan default, profitability, regression analysis, risk coverage, sustainable growth, sub-prime markets, financial management, monetary policy, economic development
Frequently Asked Questions
What is the primary focus of this research?
The research investigates the influence of strategic credit risk management on the growth and sustainability of Microfinance Institutions (MFIs) in Eldoret Municipality, Kenya.
What are the key thematic areas covered?
Key themes include loan default, risk coverage strategies, credit policy, institutional profitability, and the breadth of financial outreach to the poor.
What is the main research question?
The central question is to what extent strategic credit risk management sustains the growth of microfinance institutions and eases financial accessibility for the poor in Kenya.
Which scientific methodology is applied?
The study utilizes a survey approach with a combination of qualitative and quantitative methodologies, employing panel data regression models and the Hausmann test for validation.
What topics are discussed in the main body?
The main body covers the theoretical background of microfinance, the description of the study area, data collection methods, and an empirical analysis of how credit risk factors affect profit and membership growth.
Which keywords define this work?
The work is defined by terms such as microfinance, financial inaccessibility, credit risk, credit policy, outreach, and sustainable growth.
How does loan default affect the profitability of MFIs?
The study finds a significant negative correlation between loan default and profit, indicating that high levels of default undermine the financial health of these institutions.
Why is risk coverage considered a potential obstacle to growth?
The research concludes that excessive risk coverage requires capital provisions that reduce the liquidity available for new loans, which in turn hinders profit generation and institutional growth.
- Citation du texte
- Irene Cheptumo (Auteur), 2018, Influence of Credit Risk on the Growth of Microfinance Organizations in Eldoret Municipality (Kenya), Munich, GRIN Verlag, https://www.grin.com/document/427210
