Credit Appraisal Parameters and Asset Quality of Microfinance Banks in Kenya
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Date
2025-09
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Abstract
Microfinance banks play an important role in the provision of a wide range of financial services
and products. However, they have been struggling with huge volumes of increasing NPLs which
negatively affect their performance. The general objective of the research was to determine the
effect of credit appraisal parameters on asset quality of microfinance banks in Kenya. Specific
objectives were to determine the effect of borrower’s character, capacity, credit rating, credit
history and collateral on asset quality of MFBs in Kenya. The research was underpinned on
information asymmetry theory, transaction cost theory, theory of credit scoring and the 5 c’s
model of client appraisal. The findings reveal significant relationships between credit appraisal
parameters and asset quality in MFBs in Kenya. Borrower's character, capacity, credit rating,
credit history, and collateral all exhibit positive coefficients, indicating that improvements in
these areas are associated with better asset quality. Specifically, borrower's character, capacity,
credit rating, credit history, and collateral exhibit coefficients of -0.354, -0.135, -0.163, -0.216,
and -0.311, respectively, all significant at p < 0.05. These findings underscore the importance of
robust credit appraisal processes in mitigating credit risk and maintaining asset quality within
MFBs. Therefore, the study recommends enhancing borrower assessment mechanisms, including
character evaluation, capacity analysis, credit rating procedures, credit history reviews, and
collateral valuation, to progress asset quality management in Kenyan Microfinance banks.
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Research Article
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Citation
Kamau, R. W. Credit Appraisal Parameters and Asset Quality of Microfinance Banks in Kenya (Doctoral dissertation, Kenyatta University).