EFFECTS OF CREDIT ASSESSMENT ON LOAN REPAYMENT IN MICROFINANCE INSTITUTIONS IN NAKURU CENTRAL BUSINESS DISTRICT (CBD)

Abstract

The main goal of every microfinance institutions is to maximize profits in order to maintain their financial stability, improve growth and sustainability. However, high levels of loan delinquency create credit volatility which constrains the ability or capacity to offer credit to borrowers because microfinance institutions have to compensate loan delinquency losses. Microfinance institutions lend money to lower tier people in the society who are prone to credit risk due to their nature of service and need proactive credit assessment techniques for controlling credit risk. This study was conducted in microfinance institutions in Nakuru CBD, Kenya. The objectives of this study were to determine the effects of client appraisal on loan repayment and to ascertain the effects of credit terms on loan repayment. In addition, it aimed to evaluate the effect of credit collection policies on loan repayment. Descriptive survey research design was adopted. The target population was 32 credit officers drawn from four (4) licensed microfinance institutions in Nakuru CBD. Reliability and validity was conducted to ensure instruments used and data collected were reliable and valid. This study used census survey. The researcher collected data through administering questionnaires to the respondents because it was cheap and easy to administer. The results were analyzed using descriptive statistics (frequencies and percentages) followed by inferential statistics (chi-square and multiple linear regression model). The findings of the study show a strong relationship between credit assessment and loan repayment. A correlation coefficient of 0.74 was found out between credit assessment and loan repayment. The study concluded that credit assessment significantly influenced loan repayment in MFIs in Nakuru CBD. The researcher recommended that MFIs should ensure that they enhance use of credit assessment techniques in ascertaining reliability of information given by loan applicant so as to reduce portfolio which would have been held at risk. Findings from this study is useful to credit staff of microfinance institutions in dealing effectively with different kind of loan borrowers, equipping them with adequate knowledge about loan recovery procedures and use of effective credit assessment techniques and thus averting defaults.