Effect of loan portfolio management on the profitability of deposit taking microfinance institutions in Nairobi County, Kenya.

Abstract

Loan portfolios are the major assets of the lending institutions, therefore they should be managed well to yield the desired profitability. Loan portfolio management is one of the most important activities in financial institutions and cannot be overlooked. Sound loan portfolio management is a prerequisite for microfinance institutions’ stability and continuing profitability. As with any financial institution, the biggest risk in microfinance is lending money and not getting it back. The study sought to assess the effect of loan portfolio management on the profitability of Deposit Taking Microfinance Institutions in Nairobi, Kenya. Many studies have been done on loan portfolio management and the performance of microfinance institutions but none of them focused on the aforementioned study, instead they recommended more studies to be done on the microfinance institutions’ profitability. The main objective of this study was to assess the effect of loan portfolio management on the profitability of Deposit Taking MFIs. The independent variables examined in order to determine MFIs’ profitability are loan portfolio planning, client screening and loan portfolio monitoring. The study used a descriptive survey design. The population of the study was made up of all the Deposit Taking Microfinance Institutions operating in Nairobi County. A census was used to carry out the study. The study used primary data which was collected using questionnaires. The data collected was then tabulated and analysed using the Statistical Package for the Social Sciences. Multi regression was used to determine the effect of the independent variables on dependent variable. The results were presented in tables and graphs. The study found out that loan portfolio planning, client screening and loan portfolio control had significant influence on the profitability of Deposit Taking Microfinance Institutions. Planning is a significant factor, predicting up to 69.2% of the profitability, Client screening predicted up to 25% decrease in profitability, however, it is effectively carried out in most of the Deposit Taking Microfinance Institutions. The findings also showed that loan portfolio control was established as significant predictor of up to 51% of the profitability. The study concluded that loan portfolio management has a significant effect on the profitability of the Deposit Taking Microfinance Institutions in Nairobi County at 55.2%. The study recommended that Deposit Taking Microfinance Institutions should improve their loan portfolio control and client screening as this will help them reduce their portfolio risk, hence increase profitability