Effect of Credit Collection Strategies on Performance of Microfinance Banks in Kenya

Abstract

Microfinance banks’ major focus is mobilizing deposits from the public and lending the resources to borrowers with the aim of maximizing their returns in order to be guaranteed of their own sustainability and meeting the stakeholder’s obligations. In the process, they assume various risks which directly affect their general performance threatening the future of the banks. The main purpose of this study was to establish the effects of the credit collection strategies on the performance of Microfinance banks in Kenya. The study was guided by the following specific objectives: to determine the effect of loan portfolio monitoring , to determine the effect of credit information sharing , to establish the effect of legal framework in debt collections and to establish the effects of external debt collection on performance of microfinance banks in Kenya. Census survey was adopted as the best research design. The study targeted 12 microfinance banks registered and licensed by Central Bank of Kenya as at 31st December, 2015.Purposive sampling technique was used to select the 56 respondents drawn from the credit department. Secondary data was collected from the banking annual and supervision reports (2011-2015), Association of microfinance institutions of Kenya annual reports and the microfinance banks’ audited financial reports. Questionnaires were used as the research data collection instrument which comprised of both open and closed ended questions. The data was analyzed using descriptive and inferential statistical tools and presented using figures, tables and charts. The Pearson’s simple correlation (r=.824) indicates a strong positive correlation between credit collection strategies and the performance of microfinance banks in Kenya. Further, the study findings revealed that significant majority of the banks had an operational credit collection strategy in place which influenced the banks performance greatly. The study also found that an effective credit collection strategy translates to high profitability of the bank since it leads to low credit risk and portfolio at Risk (P.A.R).Credit information sharing during debt collection was found to have a significant influence on performance of microfinance banks. The study concluded that the banks’ had an operational credit collection strategy in place which affected their performance. External debt collection, Legal framework in collections and loan portfolio monitoring had insignificant effect on microfinance banks performance. It is recommended that embracing of information communication technology (ICT) in credit management should be a priority for microfinance banks since the new technology will help in automation of many tasks in the credit department and minimize the collection efforts. The study further recommends that the microfinance banks should embrace credit information sharing to help them recover loans, especially when borrowers know that their credit information is shared making them have an additional incentive to pay their loans as per the loan contracts. The researcher further recommends that the microfinance banks should embrace credit information sharing more to help them recover loans, especially when borrowers know that their credit information is shared making them have an additional incentive to pay their loans as per the loan contracts. On the other hand, the microfinance banks management must ensure regular and periodical reviews on credit collection strategies are done to make it more effective. The credit market is always dynamic and may render the existing strategies obsolete hence affecting debt collection and performance of the banks. The researcher focused on microfinance banks regulated by central bank of Kenya and therefore recommends a further study based on the variables under study and their effects on performance of non-deposit taking microfinance institutions in Kenya