Credit Management Practices and Loan Default in Agricultural Finance Corporation, Kenya
Chege, Mwangi Leonard
MetadataShow full item record
Between 2015 - 2020, The Agricultural Finance Corporation (AFC) experienced loan default rate of 58.8% against an industry index of 9%. With this kind of scenario unless expeditiously dealt with could in the long run bring down this Agro- financing institution. The root cause of this loan default is not yet fully established. Aim of this study therefore was to establish whether the tenets of credit management especially if adopting the credit management practices in loan making and recovery will reduce loan default in Agricultural Finance Corporation of Kenya. It sought to determine the effect of credit underwriting on loan default in AFC, the effect of credit terms on loan default in AFC, the effect of credit monitoring and evaluation on loan default in AFC, the effect of credit appraisal on loan default in AFC and the effect of credit review on loan default in AFC. This research was conducted within a business environment that is turbulent to all agro-financial institutions. This business environment is not only volatile but surprise-full in nature. This was witnessed by the rising economic inflation; increase in cost of fuel; weather changes; drought and famine; scanty harvest by farmers among others. The study adopted a descriptive research design. Data was collected by use of questionnaires administered by the researcher. The target population was 485 staff of AFC where a sample of 141 staff, particularly heads of departments from the 47 branches of AFC were selected to answer the questionnaires. These departments include Operations, Finance and Loan recoveries. The selection of the 141 heads was based on purposive sampling. The purpose of choosing the heads is because they are involved in the loan making process from appraisal to collection and therefore have adequate information on reasons of loan default from the company’s point of view. Data was analyzed using Statistical Package for Social Sciences (SPSS) version 21. Multiple regression model analysis was conducted to determine the effect between the study independent variables and the quantitative dependent variable (loan default). Descriptive analysis was presented using statistical presentation techniques such as tables. The study found out that credit underwriting, terms of credit, credit monitoring and evaluation, and credit review were statistically significant in predicting loan default. Terms of credit was found to increase loan default but on the other hand, credit underwriting, credit monitoring and evaluation and credit review decreases the likelihood of loan default. The management should have a better understanding of credit underwriting that will assess the credit score and income statements of the clients. Loans should be underwritten considering the five Cs criteria which will flourish credit management. This will help create a fair appraisal system by ensuring enhanced loan payment as well as better satisfaction comprehension by the agricultural institution. AFC should put in considerable credit terms that are well communicated aimed at cushioning its clients against inflation and increased cost of living. The organization should establish an enabling monitoring and evaluation system which will help in reporting to the financial institution about the status of the project. This will help in assessing the implementation of the project and results reflected in the post-disbursement report. Credit review should be done to assist the institution in assessing its credit quality over time to enable it understand lending cycles and the most profitable ventures and the ones that have a high risk of default. This will enable the institution make informed lending decisions to maximize the performance of the loan portfolio. These findings will act as a reference for other scholars who will undertake similar studies in future while solving the problem of loan default.