EFFECT OF CREDIT RISK MANAGEMENT PROCEDURES ON FINANCIAL PERFORMANCE AMONG MICROFINANCE INSTITUTIONS (MFIs) IN KENYA: A CASE OF MFIs IN NAIROBI COUNTY

ABSTRACT 
The purpose of the study was to analyze the credit risk management procedures adopted on financial performance of microfinance institutions in Kenya. Specifically, the study sought to determine the extent to which risk identification, risks monitoring procedures, and risk analysis and assessment procedures are applied in credit risk management by microfinance institutions in Kenya and their overall effect on the financial performance of the MFIs. The study adopted the descriptive design. The population of the study was consisted of credit managers and officers in the 54 Microfinance Institutions in Nairobi County. The researcher used the questionnaires to collect the data. The questionnaire was first pretested on credit managers and their assistants whose results were included in the final results. The data collection was done through a combination of drop and pick and self-administration methods. Data analysis was based on descriptive and inferential statistics. Data analysis was done using the Statistical Package for Social Sciences (SPSS). The results were presented using table and charts. The study found out that the organization considered risk identification, risks monitoring, risk assessment, risk analysis as a process in credit risk management. The study established that these procedures were important as they ensured that the risk management function was established throughout the whole corporation. The study concludes that the management of the Microfinance institutions are enhancing their credit risk management by putting in place measures to curb the risk and this enhances efficiency of services of the institutions. The study recommends that stiff measures should be put in place to run the credit risk management in order to enhance positive performance in the Microfinance institutions. The MFIs should also spearhead in application of procedures which are applied in the management of Microfinance institutions. Lastly, the study recommends further studies to be done on the effects of credit risk management procedures on financial performance of Micro finance institutions in Kenya.

CHAPTER ONE 
INTRODUCTION 
Background of the study 
Credit risk management forms a key part of a company’s overall risk management strategy. Weak credit risk management is a primary cause of many business failures. Many small businesses, for example, have neither the resources nor the expertise to operate a sound credit management system (Mc Menamin, 1999). When a company grants credit to its customers it incurs the risk of non-payment. Credit management, or more precisely credit risk management, refers to the systems, procedures and controls, which a company has in place to ensure the efficient collection of customer payments thereby minimizing the risk of non-payment (Mokogi, 2003). 

World Bank defines Micro Finance Institutions (MFIs) as institutions that engage in relatively small financial transactions using various methodologies to serve low income households, micro enterprises, small scale farmers, and others who lack access to traditional banking services CBS (1999). Financial intermediation is of great importance in any economy (Dondo & Ongila 2006). According to Kenya’s Poverty Reduction Strategy Paper (PRSP) and vision 2030, the financial sector is expected to play a catalytic role in facilitating economic growth through SMEs. Access to formal credit by small- scale business persons has been quite poor particularly among the low-income category. This is largely as a result of the credit policies associated with loans provided by the formal sector (Ringeera, 2003). 

According to Mokogi (2003), even if granting credit may accrue benefits of increasing sales to the institution, there are high default risks that may adversely affect its future. Financial institutions therefore have to come up with appropriate credit management policies that will yield the maximum benefits and reduce the risk of defaults. Credit policies vary from one institution to another; a firm’s unique operating conditions dictate the kind of credit policy to adopt. Myer and Brealey (2003) noted that if services are offered on credit, the profit is not actually earned unless the account is collected. 

Financial institutions take into consideration a number of factors before setting the credit standards. They include financial stability of the customer, the nature of credit risk on the basis of prior record of payment among others. In establishing credit terms, the institution should consider the use of cash discount. An increase in the average collection period of a institution may be the result of a predetermined plan to extend credit terms or the consequence of poor credit administration (Block & Hirt, 2005). 

In recent years, a growing number of developing countries, including Kenya, have embarked on reforming and deregulating their financial systems, transforming their financial institutions into effective intermediaries and extending viable financial services on a sustainable basis to all segments of the population (Seibel, 2006). By gradually increasing the outreach of their financial institutions, some developing countries have substantially elevated poverty lending, institutional strategies and financial systems approaches. In the process, a new world of finance has emerged, which is demand-led and savings driven and conforms to sound criteria of effective financial intermediation. As a result of the successful integration of microfinance strategies into micro policies, this makes banking in the micro economy and the poor both viable and sustainable. 

Throughout 1980s and 1990s, the financial institutions, which were mainly Non- Governmental Organizational-based credit programs, improved on the original methodologies and reviewed their policies about financing the poor. During this period it was demonstrated that poor people, especially women, repaid their loans with near- perfect repayment rates, unheard of in the formal financial sectors of most developing countries, were common among the better credit programs. The poor were also willing and able to pay interest rates that allowed MFIs to cover their costs. As a result of these two features, i.e. high repayment and cost-covering interest rates, enabled some MFIs to achieve long-term sustainability while reaching large numbers of clients. The promise of microfinance as a strategy that combines massive outreach, far reaching impact and financial sustainability makes it unique among development interventions.

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Item Type: Kenyan Postgraduate Material  |  Attribute: 75 pages  |  Chapters: 1-5
Format: MS Word  |  Price: KSh900  |  Delivery: Within 30Mins.
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