Effect of borrowers’ information on credit risk management; A case of microfinance institutions in Nakuru Town

Abstract

Throughout the developing world, the growing availability of consumer credit and the heightened competition between microfinance institutions have made the necessity of borrower information all the more apparent. However, the extent and efficiency of borrower information vary greatly. Borrowers have often used the underlying challenge of information asymmetry to create multiple bad debts in MFIs in Kenya. The purpose of this study therefore was to establish the effect of borrowers‟ information on credit risk management in MFIs in Nakuru Town, Kenya. The study specifically looked at the effect of information on borrower‟s capacity, borrower‟s capital, borrower‟s collateral, borrower‟s conditions and borrower‟s character on credit risk management. The study employed a descriptive research design and targeted managers and finance related employees in 18 MFIs in Nakuru Town, Kenya who totaled 198. From this population, statistical formula was employed to establish a sample size of 67. The sample was allocated proportionately and later simple random sampling was used to collect data. The study used a closed ended questionnaire which was piloted to ensure validity and reliability. The data collected was then coded and analyzed using SPSS Version 21 and presented in tables. For purposes of testing the hypothesis of the study, a regression analysis was carried out. It was established that the coefficient of correlation (R) for the relationship between the independent variables and the dependent variable was 0.433. The value therefore indicated a strong and positive correlation. The R2 value of 0.188 implies that 18.8% of the variations in credit risk management of MFIs in Nakuru Town can be explained by the variations in independent variables in the study, that is, information on the 5Cs of applicants had an effect on credit risk management.