Microcredit Requirements and Portfolio Quality of Microfinance Institutions in Kenya

Abstract

Microcredit has emerged as a promising tool for financial inclusion by addressing the gap left by large financial institutions, such as commercial banks. Microcredit institutions come in handy to provide credit for low or inconsistent income borrowers with a goal of encouraging entrepreneurship and poverty alleviation which is usually hindered dearth finances. Moreover, the clients usually do not have collateral; their level of income is low, great level leverage, low liquidity and small or non-verified credit history. So, these firms are usually faced with high level of default. Empirical literature also indicated that the Kenyan MFIs have faced poor quality of portfolio. The study aim was determination of the effect microcredit requirements have on portfolio quality based on Kenyan MFIs. The study specifically sought to establish the effect of collateral requirements, average profits, leverage level, and liquidity level on quality of portfolio of Kenyan MFIs. The study was based on three theories; agency theory, modern portfolio theory and liquidity preference theory. The study adopted a survey research approach on respondents of MFIs in Kenya. Secondary data was obtained using data collection sheet. Analysis of data was done by use of descriptive and inferential statistics using SPSS. The R-squared was used to describe the variations in quality of portfolio due to alterations in microcredit needs. The F-statistics at 95% level of confidence could ascertain significance in the link of the variables. The variables significance decision was on the basis of P-values on 5% level of significance. The study established that portfolio quality was strongly and inversely correlated with liquidity level but weakly and inversely correlated with collateral requirements and average profits. On the other hand, portfolio quality was strongly and positively correlated with leverage level. The study also established that increasing operational assets, average profits and liquidity level would significantly lead to a decrease reduced portfolio quality of MFIs in Kenya. However, increasing leverage level would lead to an increase in portfolio quality. The study concluded that all the independent variables, collateral requirements, average profits, leverage level, and liquidity level, were significant in forecasting portfolio quality of MFIs in Kenya. It was recommended that the management of MFIs in Kenya ought to carefully ascertain and stress on operational assets, average profits, leverage level, and liquidity level since they significantly affect quality of portfolio of MFIs in Kenya. Lastly, it suggested that other researches ought to be done to determine the determinants of portfolio quality between deposit and non-deposit taking MFIs. It is also recommended that similar studies should be conducted in other jurisdictions beyond Kenya to establish if macroeconomic variables such economic growth level may have an impact on the study variables and other studies be done to cover longer periods to establish if related conclusions could be made.