Evaluation of microcredit programs offered by Micro financial institutions in Nairobi

Date
2013
Authors
Gitonga, Lilian K.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Microcredit can only be effective if it is judiciously used to ensure that both the lender and the borrower reap the maximum possible gain. Group micro-lending has been used successfully in some parts of the world to expand the reach of microcredit programs. However, this study shows that microfinance institutions in Kenya prefer individual lending which is associated with higher default rates compared to group lending. The study also shows that high interest rates increase the odds of client delinquency while loan size is inversely related to delinquency. Given these findings, policymakers need to work for stability in the macro-environment to ensure interest rates charged by microfinance institutions (MFls) remain stable and affordable. Further, MFls can develop a graduated scale for charging interest rates in which credit is extended to groups at first to hedge the firm against repayment risk; following this, the firm identifies individuals within the groups whose credit risk has improved and issues progressive individual loans to them. Such individual loans would fetch higher returns in form of interest for MFI and boost their outreach, reduce delinquency, and enhance self-sufficiency.
Description
A management research project submitted in partial fulfillment of the requirements for the Degree of Bachelor of Commerce
Keywords
Delinquency, microfinance, microcredit, group loans, individual loans
Citation