Abstract
The purpose of this study was to determine the relationship between interest rate, corporate membership and loan repayment in MFIs in Nakuru County. The study was guided by two objectives; to investigate the role of interest rate in loan repayment in MFIs in Nakuru County and to analyze the role of corporate membership in loan repayment in MFIs in Nakuru County. The study adopted correlation design and was guided by multiple regression models. The study collected data through structured questionnaires that had adequate research items on every research indicator. Collected data was analyzed using STATA and results were presented using tables. The findings of the study revealed that interest rate is not a determinant of loan repayment in Micro Financial Institutions in Nakuru County and it was concluded that interest rate charged on a loan does not impact on repayment. Similarly, it was evident that corporate membership is not significant determinant of loan Repayment in micro financial institutions in Nakuru County. The study recommends that institutions should establish a close relationship between the lenders and the borrower through monitoring, business advice and regular meetings. The institution can also develop a reward system to those borrowers who repay their loans on time through discounts on subsequent loans and savings. Further studies should be conducted to examine if the following determinants are associated with loan repayment in MFIs period of membership, security given, utmost good faith, consistency of payment during previous loan and social problems.
Highlights
The potential of using institutional credit and other financial services for poverty alleviation in Kenya is quite significant
In spite of the importance of this sector, experience shows that provision and delivery of credit and other financial services to the sector by formal financial institutions, such as commercial banks has been below expectation
Logit model regression was used and the results suggested that experience, training time and sanctions have positive and significant effects on loan repayment performance
Summary
The potential of using institutional credit and other financial services for poverty alleviation in Kenya is quite significant. According to the National Micro and Small Enterprise Baseline Survey of 1999, there were close to 1.3 million MSEs employing nearly2.3 million people or 20% of the country’s total employment and contributing 18% of overall GDP and 25% of non-agricultural GDP Despite this important contribution, only 10.4% of the MSEs receive credit and other financial services. In spite of the importance of this sector, experience shows that provision and delivery of credit and other financial services to the sector by formal financial institutions, such as commercial banks has been below expectation This means that it is difficult for the poor to climb out of poverty due to lack of finance for their productive activities. New, innovative, and pro-poor modes of financing low-income households and MSEs based on sound operating principles need to be developed (Omino, 2005)
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