Factors that influence loan default rate; a case of the micro finance firms in Nairobi, Kenya

Abstract

This study investigated the influence loan design, client screening and credit committee control have on loan default rate in the microfinance firms. The need to carry out this study was influenced by the fact that non-performing loan has continued to increase over the years from 9.55% in 1997 to 38.4% in 2001 (MI, Banking Survey 2002, PP 122). Competition for microfinance clients has become fiercest with some borrowing more than they can handle leading to delinquencies or no performing loans. Existence of non- performing loan reduces the profitability of an institution and its sustainability or survival. During literature review, the researcher established that related studies have been done on commercial banks but no study have been done to establish the influence loan design, client screening and credit committee control have on the loan default rate in the microfinance firms in Kenya. The study adopted descriptive research design which involves breaking down vague problem statement into smaller and precise sub-problem statement. This research design was used to obtain information on the current status of phenomenon. It entailed survey and fact-finding and sought to establish the relationship between the variables the study also used explanatory design because the tools allowed the use of primary and secondary data and gave room for application of the study results. A face- to- face interview and structured questionnaire were used in data collection to elicit the required information needed for the purpose of completing the study. The population consisted of the 27 registered firms with AMFI from which a sample of 50% firms was selected by stratifying the population and selecting them randomly. The researcher piloted the study to test the research instruments to ensure their validity and reliability. The advice of the University Supervisor was sought to correct any ambiguity detected in the research instruments before field administration. Data were analyzed through tabular presentations, pie charts and graphs. The analysis touched all the research questions clearly showing the relationship between loan product design, client screening, credit committee control and loan default rate. Later, the study results, study recommendation and conclusion were drawn which gave room for further study.