The debt restructuring strategies and the level of non-performing loans in microfinance institutions in Nairobi County

Abstract

The purpose of this study was to determine the influence of debt restructuring strategies on the level of non-performing loans in microfinance institutions in Nairobi County. Specifically, the study sought to establish the effect of debt rescheduling, interest rate reduction and haircuts on the level of non-performing loans in MFIs in Nairobi County. Explanatory research design was adopted with the population of study comprising of all 57 MFIs in Nairobi County under umbrella body AMFI. Both primary and secondary data was collected. Primary data was collected with the help of a semi structured questionnaire while secondary data covering a period of five years from 2014-2018 was collected from AMFI published annual supervisory reports and MFIs final financial statements using a data collection sheet. The main respondents were credit managers from all the 57 MFIs. Data was analysed using descriptive statistics (mean and standard deviation), correlation analysis as well as simple and multiple linier regression analysis. The SPSS software was used to analyse the data. Results indicated that debt restructuring strategies were moderately adopted. The results also showed that non-performing loans and debt rescheduling in the MFIs are strongly and negatively correlated (r=-0.682), interest rate reduction had a weak negative correlation with non-performing loans (r=-0.120) while haircuts had a positive weak correlation with non-performing loans (r=0.201). Debt rescheduling and interest rate reductions were found to have a statistical significant influence on NPLs (adjusted R2=0.652; F=96.550>4.0343; β=-0.355; P-value=0.008<0.05), Adjusted R2=0.542; F=61.270>4.0343; β=-0.294; P = 0.000<0.05) respectively, while haircuts were insignificant (adjusted R2=0.062; F=4.396>4.0343; β=0.042; P=0.000<0.855). Combined, debt rescheduling, interest rate reduction and haircuts were significant (adjusted R2=0.773; F=58.785>2.798; P=0.000<0.05). Based on these results, the study concluded that debt rescheduling was the most significant in predicting the level of NPLs while haircuts had no significant influence on the level of NPLs in MFIs in Nairobi County. Therefore, the study recommends that MFIs should carefully evaluate possibility of rescheduling repayment periods for struggling borrowers. They should also refine the interest rates charged to clients so as to ease repayment difficulties. MFIs should also consider the use of more than one debt restructuring strategy to address NPLs.Futher studies should also be carried out on other debt restructuring strategies not included in the study to determine whether they have a significant influence on the level of NPLs in MFIs in Kenya.