Assessing Borrower’s and Business’ Factors Causing Microcredit Default in Kenya: A Comparative Analysis of Microfinance Institutions and Financial Intermediaries

Abstract

A major concern on microcredit repayment remains a major obstacle to the Micro Financial Institutions (MFIs) and Financial Intermediaries (FIs) in Kenya. The health of MFI sector in Sub Sahara Africa (SSA) is a cause of concern due to the increased portfolio at risk (PAR). This region records the highest risk globally. Its PAR 30 is greater than 5 percent. This study sought to investigate causes of loan default within MFIs and Financial Intermediaries (FIs) in Kenya. The study addressed the following specific objectives; (1) to evaluate the influence of borrower’s characteristics on loan default in MFIs and FIs (2) to investigate the relative influence of business characteristics on loan default in MFIs. A target population of 294 MFIs institutions and 76 Financial Institutions was used. A multistage sampling procedure was used to save time and cost by narrowing down on the regions and branches since they were widely spread, a sample of 106 MFIs and 40 FIs was selected. Random sampling was used and primary data collected by use of a questionnaire. Data was analyzed by quantitative methods by use of SPSS; Version 21. Descriptive statistics and inferential statistics were employed to make generalizations while Factor Analysis was done to reduce the high numbers of factors to a smaller number which were significant. A multiple regression model and Pearson correlation were used to establish relationships among the variables. The findings of the study indicated that two variables namely; borrower’s characteristics and business characteristics were significant among MFIs and FIs but with some differences in the parameters measured for the two variables.

Keywords: Microcredit Default, Micro Financial Institutions (MFIs), Financial Intermediaries (FIs), Portfolio at Risk (PAR)