Debt Collection Mechanisms and Loan Recovery in Micro-Finance Institutions in Kenya
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Date
2024-05
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Kenyatta University
Abstract
Microfinance Institutions play a crucial mandate in providing credit facilities to support
individuals and businesses. Loan recovery mechanisms ought to be put in place to ensure
defaulters meet their obligation of paying off their overdue debts. There are fluctuations of
the rates of the non-performing loans which show inconsistency in recovery of loans in the
Microfinance Institutions (MFIs) in Kenya. The study sought to examine the effect of Debt
Collection Mechanisms on Loan Recovery in Microfinance Institutions in Kenya. The
research objectives were; to examine effect of Institution Portfolio Monitoring on loan
recovery in Microfinance Institutions in Kenya having their headquarters situated in
Nairobi City; Effect of Digital Credit Technology on loan recovery in Microfinance
Institutions in Kenya and the effect of debt collection agencies on loan recovery in
Microfinance Institutions in Kenya. The study relied on three theories; The Theory of
Delegated Monitoring, The Grameen Solidarity Group Theory and the Loanable Funds
Theory. For this study, the researcher employed Causal research design. The target
population was all the 14 licensed MFIs in Kenya were targeted. The researcher used three
types of diagnostic tests namely; normality test, multicollinearity test and autocorrelation
test to test validity and assumptions of regression model. Purposive sampling to select
MFIS with headquarters in Nairobi City County was used and the respondents to the
research instrument while at the same time adhering to the required moral values and
standards during the research period. The study used both primary and secondary data,
data collected on NPL indicated that between 2017 and 2018 there was an increase of NPLs
by Kshs.518 million translating to 6%, 2018 and 2019 a decrease of NPLs by Kshs.74
million translating to -1%, 2019 and 2020 an increase by Kshs.3162 million translating to
24% and between 2020 and 2021 an increase of NPLs by Kshs.816 million translating to
6%. This indicated how loan recovery was affected in different years. For the primary data,
structured questionnaires were used in collection of primary data while for quantitative
data descriptive and inferential statistics which is multiple regression analysis together with
the analysis of variance (ANOVA). SPSS version 26 was applied in analyzing the
quantitative data. The significance of the entire model and each individual parameter was
determined by the F test and p-values, respectively. According to the findings, R-square
value was 0.627, which means that 62.7 percent of the debt collection mechanisms is
associated with the three independent variables considered in the investigation (Institution
Portfolio Monitoring, Digital credit technology, Debt collection agencies), and the
remaining 37.3 percent can be attributed to other mechanisms outside the purview of this
study. In conclusion, the study shows that debt recovery mechanisms used in this study
collectively had a stronger effect on loan recovery process. The study therefore
recommends that finance institutions to consider corroborating credit performance reviews
alongside debt recovery mechanisms in their operations.
Description
A Research Project Submitted In The School of Business, Economics and Tourism in Partial Fulfillment Of Requirement for the Award of the Degree of Master of Business Administration (Finance Option), Kenyatta University, May 2024.
Supervisor
harity Njoka