Joint Liability and Group Loan Performance among Micro Finance Institutions: A Case of Nyandarua County, Kenya
Njoroge, Newton Riunge
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Group based lending has been synonymous with most borrowers of the lower economic end in the developing world and this is no exemption to borrowers in Kenya. For a long time low income earners had been left out and were previously unbanked. The microfinance model through group lending has ensured inclusion of these players to the economy. Group lending is done through self-organised groups of individuals mostly between 5 and 20 who lack mainstream collateral but can co guarantee each other’s loans to ensure they access funding. Group lending most dominant feature is joint liability that involves the group members being responsible for all loans in the group and being obligated to take action against a non-paying member or paying the loan of such a member. Joint liability depends on sanctions that are imposed on a defaulter which include seizure of households that may have been pledged as security, discrimination on a non-paying member and denial of future funding. This study sought to investigate the effects of joint liability on group loan performance for Micro Finance Institutions in Nyandarua County, Kenya. The study was carried out using descriptive survey design. The study relied on a population of 11 Micro Finance Institutions with operations in Nyandarua County as gathered from the Association of Micro Finance Institutions of Kenya (2017). The study used the census study approach to identify the micro finance institutions to study alongside the purposive or judgemental sampling approach to sample the target respondents. The purposive sampling procedure targeted a total of 66 respondents comprising of branch managers, credit managers, finance and investment officers, customer care officers, operations managers and loan officers of Micro Finance Institutions offering group lending in Nyandarua County, Kenya. The research relied on primary data from questionnaires which highlighted various aspects of group liability lending and performance of the group loans. Validity and reliability of the instrument was assessed using Cronbach’s Alpha Reliability Test, pre-testing and expert opinion. The study adopted the drop and pick method for data collection. Data analysis involved use of both bivariate and multivariate analysis. Both descriptive and inferential statistics were useful for the study at hand. Correlation and Regression Analysis models were the key inferential statistical procedures in testing the research hypotheses. The study was important in bringing out the specific group lending practises and how such practises are impacting on the group borrowing. The group loan performance of the Micro Finance institutions in Nyandarua County was considered fairy good with the average group repayment of loans standing above two thirds but highlighting need to drive the organisations towards full group loan repayment. The average growth in group loan portfolio was also found to be fairly good although some players in the sector were not registering attractive figures in loan portfolio growth hence need to device ways to improve growth in loan book. On the same note, the average net profit margin stood just slightly above the quarter mark which calls for action towards the improvement in profitability. As demonstrated by the Coefficient of Determination or R square, more than three quarters (75.70%)of the variation in the Group Loan Performance of MFIs was explained by variability in the joint liability lending factors including enforcement of social sanctions, loan monitoring, moral hazard control and adverse selection control. The study recommends that MFIs rethink and redefine their lending strategies in order to ensure an improvement on profitability which was found not to be very attractive.