A Survey of Credit Risk Management Techniques Used by Microfinance Institutions in Kenya

Abstract

This study had two objectives. First, to identify the techniques used by microfinance institutions in the management of credit risk in Kenya. Second, to examine the main challenges facing the microfinance institutions in the management of credit risk. The study used a descriptive research design. A survey research design was used to collect the data. A sample size of thirty microfinance institutions was surveyed. The sampling frame included the Central bank of Kenya Directory (2006) of microfinance institutions. Purposive sampling was used to select one credit officer and one loan officer from each of the sampled institutions. Primary data was collected using semi-structured questionnaires. The questionnaires were dropped and picked up later and others were sent and received via email. The target respondents were the institutions’ loans and credit officers. Data analysis involves computation of summary statistics such as means, percentages and standard deviations. The study established that most microfinance institutions use 6C techniques of credit risk management. The results also revealed that understanding the organizations exposure to credit is treated as critical by the microfinance institutions. To avoid loan losses, the microfinance institutions used follow ups. The results also show that MFIs take loan review analysis as crucial aspects of risk management by doing proper documentation and analysis. The institutions also use litigation in situations where the borrower’s financial situation and structure have been altered and the original promised value of collateral differ. The study established that a majority of the institutions used Credit Metrix to measure the credit migration and default risk. The results also show that the microfinance institutions are faced with the challenge of strict operational regulations from the Central Bank of Kenya. The government had not put any policy in place to govern the operations of the MFIs. Loan recovery is a major challenge to the majority of the institutions.

Keywords: Credit Risk Management, Microfinance Institutions, Credit Migration, Credit Metrix, Loan Review Analysis