Loan Risk Analysis and Financial Performance of Microfinance Institutions in Western Region, Kenya

Abstract

The study was conducted to establish the effect of loan risk analysis on financial performance of microfinance institutions in western Kenya. The study was guided by credit risk theory. This study utilised a descriptive research design. The target population of this examination comprised of all the 15 registered microfinance institutions in Western region as per the records of Central Bank of Kenya. This study used census to target fifty-six respondents from the fifteen microfinance institutions. Questionnaires were used to collect data targeting the credit managers, accountants and the finance managers of the microfinance institutions since they were better placed to offer the required information for the investigation. Inferential as well as descriptive statistics was used in analyzing data. This was done using simple regression model and frequency distribution using mean, standard deviation and percentages. The study findings revealed that loan risk analysis (=0.159, t = 2.276, p=0.028 <0.05) had a significant influence on financial performance of Microfinance Institutions in western region Kenya. The study concludes that when microfinance institutions analyse their loans by evaluating loan terms, contacting clients who are late in payment and putting in place the right mechanisms for limiting exposure to bad debts, this may enhance their financial performance. The study recommends that policy makers and institutional administration should prioritise mechanisms for limiting loan exposures while strengthening recovery measures to enhance overall financial performance of microfinance institutions.