Effect Of Credit Management On Asset Quality Of Microfinance Institutions In Nairobi Metropolitan

Abstract

Effective credit management ensures that clients are able to pay for the product/services rendered on credit. Management of credit is very critical for asset quality as it constitute an important part of the overall loan process. In Kenya, the aspect of non-performing loans has continued to be a significant issue among Kenyan MFIs. Therefore, the current survey sought to examine the effects of credit management on asset quality of microfinance1institutions in Nairobi Metropolitan. The specific variables that the study sought to explore were credit policy, credit standards, credit terms and credit collection techniques of MFIs. The study was anchored on four key theories i.e., information asymmetry theory, transaction cost theory, credit risk theory and modern portfolio theory. The study adopted descriptive research design and also used cross-sectional data. The cross-sectional data was obtained by combining both secondary and primary data involving all the 74 microfinance institutions within Nairobi Metropolitan area. Secondary data was obtained from published financial reports of all MFIs in Nairobi Metropolitan area. On the other hand, primary data was obtained using structured questionnaire. The target population for whom the questionnaires was administered composed of all 74 credit executives from all targeted microfinance institutions within Nairobi Metropolitan area. Collected data was analyzed with the aid of STATA Version Software and presented using tables and figures. The generated results were then be presented using frequency table, and figures. The researcher adhered to all ethical values in research particularly the confidentiality of the information obtained. On the effect of credit policies on asset quality of MFI, the study found out that there was a negative yet insignificant effect of credit policies on asset quality of MFIs in Nairobi Metropolitan. On the effect of credit collection techniques on asset quality, the study established that credit collection techniques are positively and significantly associated with asset quality of micro-finance institutions. On the effect of credit terms on asset quality, the study established that credit terms had a negative yet non-significant relationship with asset quality. Lastly, on the effect of credit standards on asset quality, it was revealed that credit standards had non-significant negative relationship with asset quality. It was concluded that a strong positive relationship between credit collection techniques and asset quality. Further, it can be concluded that investment in credit collection techniques can lead to better asset quality of MFIs in Nairobi Metropolitan. The study therefore recommended that MFIs in Nairobi metropolitan should not adopt a more stringent credit policy but a much more lenient policy for improvement in their asset quality. In addition, it was recommended that MFIs in Nairobi metropolitan should continue improving on their credit collection techniques/systems as a way of improving asset quality.