The Influence of Co-Guarantee Factors on Loan Default in Micro Finance Institutions in Kenya: A Case Study of K-Rep Bank.
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Date
2015-04
Authors
Journal Title
Journal ISSN
Volume Title
Publisher
Daystar University, School of Business and Economics
Abstract
The main goal of every financial institution is to operate profitably. However, high levels of loan default have negatively affected the financial sector. For a long period, MFIs and SACCOs have employed different guarantee mechanisms from mainstream commercial institutions. With groups and individual members, both (MFIs and SACCOs) use the co-guarantee mechanisms as the only collateral to accessing financial services. However, a key concern that is emerging is the high default rate that is likely to affect accessibility, affordability and quality of financial services, and hence the need to understand the underlying factors for future programming of financial access services. The researcher did a correlation analysis of factor that enhances loan default, with loan default as dependent variable, and was categorized into four (4); normal default (30-60 days), watch status (60-90 days), substandard (90-120 days) and loss (+120 days). Loan amount, group duration, number of group members, incentive mechanisms, monitoring of projects and self-selection of members as independent variables. The findings indicated that loan amount and number of group members have a strong positive relationship with loan default (r >0.9). Self-selection had strong negative relationship with loan default (r > -0.9) while monitoring of projects and joint liability had a moderate negative relationship with loan default (r>0.7). All these relationships were significant at 1 percent level of significance (p<0.01). The study recommends that finance institution should capacity build groups on monitoring of projects for a good understanding of the investment rate of return; groups that have been together for long are less likely to default and financial institution should further implement other incentive mechanisms, in addition to non-refinancing to defaulters.
Description
MASTER OF BUSINESS ADMINISTRATION in Finance
Keywords
financial institution, profit, future programming, MFIs and SACCOs
Citation
Jelagat, K. D. (2015). The Influence of Co-Guarantee Factors on Loan Default in Micro Finance Institutions in Kenya: A Case Study of K-Rep Bank. Daystar University, School of Business and Economics