Effect Of Information Asymmetry On Cost Of Borrowing Among Micro-finance Clients In Kenya

Abstract

Money and credit are the lifeblood of an economy. The ability of borrowers to access credit at reasonable terms is critical to facilitate investment and commerce, and thereby sustain economic growth. The poor still find it difficult to access finances from MFIs because of the fairly high cost of loans. Most microfinance clients are information opaque and this partly explains the high risk premium attached to lending hence higher interest rates. Accordingly, the purpose of this study was to find out the effect of information asymmetry on the cost of borrowing among microfinance clients. Specifically, the study sought to find out: effect of credit history on the cost of borrowing; effect of soft information on the cost of borrowing; and, effect of borrower proximity on the cost of borrowing. The study employed a descriptive survey design. This research relied purely on primary data which was collected using a structured questionnaire. Both descriptive and inferential statistics were used for data analysis. A multiple regression model was used to estimate the relationship between information asymmetry and cost of borrowing. The study findings show that borrower credit history and soft information are significant influencers of borrowing cost among microfinance borrowers in Kenya. Favourable borrower credit history and soft information have a favourable effect of reducing the borrower cost of borrowing among microfinance borrowers in Kenya. However, the study also concludes that in the Kenyan context borrower proximity has no effect on the cost of borrowing among microfinance borrowers in Kenya. This implies that microfinance institutions in Kenya do not take into account the physical distance of the borrower from the MFI when evaluating a loan application. The study recommends that microfinance institutions in Kenya should leverage borrower credit history and soft information to mitigate information asymmetry challenges. This practice will also be beneficial to the borrowers who possess good credit history standing and positive soft information. By extension this will make the bottom of the society (microfinance clients) to access credit at favourable terms. In turn, this will have a positive impact on the economy by mainstreaming the poor into economic participation through affordable credit which can be used to finance business operations sustainably.