Factors affecting microfinance institutions' credit risk management practices in Kenya

The general objective of this study was to evaluate the factors affecting microfinance institutions’ credit risk management practices in Kenya. Specific objectives that were evaluated were how market concentration, portfolio quality and market infrastructure affected credit risk management practices in microfinance institutions in Kenya over the three year period from 2009 to 2011. The study utilized a descriptive design. The target population of the study was the credit managers /staff working in the head offices in Nairobi of the forty six microfinance institutions in Kenya who were members of the Association of Microfinance Institutions of Kenya. A questionnaire was used to collect data. Data was analysed using Excel to obtain descriptive statistics such as frequencies, pie charts and mean scores and SPSS Version 17.0 to establish the correlation between the dependent and independent variables. Results indicated that market concentrated had a negative and significant effect on credit risk management. Results also indicated that portfolio quality was positively and significantly related with credit risk management. Also the study findings showed that market infrastructure was positively and significantly related to credit risk management. It was concluded that low levels of market concentration contribute to poor credit risk management of microfinance institutions. Portfolio quality was on the decline as evidenced by the trend over the three years running from 2009 to 2011.This seems to indicate that more loans are likely to be defaulted on in future if the trend is not reversed. This would be as a result of the increasing market competition that puts pressure on microfinance institutions to capture a larger market share while compromising on client screening in an environment of poor client information. The unique contribution of this paper is that it reduces the lack of conclusiveness on the debate of whether market concentration, market infrastructure and portfolio quality affect the credit risk management practices employed by MFIs in Kenya. The paper concludes that these factors do have a significant effect on credit risk management practices employed by MFIs in Kenya