DEBT RECOVERY STRATEGIES ON FINANCIAL PERFOMANCE OF MICROFINANCE INSTITUTIONS IN MOMBASA COUNTY

Abstract

The purpose of the study was to investigate the debt recovery techniques on loan performance of deposit taking MFIs in Mombasa County. The theories guiding the study are moral hazard theory, Value Based Portfolio Theory, credit market theory and loanable funds theory. The study used cross-sectional descriptive research design. The target population of the study was management of the 6 MFIs which are licensed by CBK and have fully-pledged branches in Mombasa. The study employed stratified sampling technique to divide the target population into different groups and those with similar characteristics were grouped in together then sample for the study was selected at random from each stratum. The study employed Yamane formula to derive a sample of 52 respondents. The study used primary and secondary data. A structured questionnaire was used to collect the primary data. Collected data was quantitatively analyzed by use of Statistical Package for Social Science (SPSS) version 26. The data analysis techniques used are descriptive statistics, correlation analysis and multiple regression analysis. Regression results revealed that loan limit reduction had significant positive effect on financial performance of (β= .394, p < 0.05). Collection policy was found to have a positive and significant effect on financial performance of (β= .476, p < 0.05). Adverse credit listing was found to have a positive and significant effect on financial performance of (β= .483, p < 0.05). Fines and penalties had a positive and significant effect on financial performance of (β= 0.429, p<0.05). Findings led to rejection of the null hypothesis that there is no significant effect of fines & penalties, adverse credit listing, collection policy and loan limit reduction on financial performance of MFIs. The study concludes that the microfinance utilizes the private collection agents to recover outstanding amounts from the defaulting borrowers. Micro finance institutions have a maximum loan limits policy for new clients and that the micro finance institution has a baseline lending policy to new clients. The deposit taking micro finance performs credit scoring on the borrower before issuing approval for loans. By imposing penalties on loans, it serves to reduce the non-performing loans by making borrowers repay their dues for fear of penalization which could be costly on the loaners. The study recommended that the management of MFIs should make use of private collection agents to help the institutions recover outstanding loan amounts from the non-paying borrowers. The use of these private collectors has a potential to recover the bad debts as they have unique deterrence measures which are not allowed in the MFIs sector. The MFIs should base their decisions on whether to give loan or to decline based on the borrower past credit history.

Key Words: Debt Fines and Penalties, Adverse Credit Listing, Loan Limit Reduction, Collection Policy

CITATION: Masaku, S. N., & Ibrahim, A. (2024). Debt recovery strategies on financial performance of microfinance institutions in Mombasa county, Kenya. The Strategic Journal of Business & Change Management, 11 (2), 881 – 893. http://dx.doi.org/10.61426/sjbcm.v11i2.2956