Collateral Requirements and Quality of Loan Portfolio of Microfinance Banks in Kenya
Abstract
The microfinance sector in Kenya has been grappling with a significant challenge, as evidenced by the 5.55 percent of net non-performing loans to the net loan portfolio for microfinance banks over the four-year period between 2019 and 2022. The International Monetary Fund and World Bank consider a non-performing loans ratio of 5 percent or higher as a sign of vulnerability and potential financial instability. The study was grounded by lender-based theory, utilized a positivism research philosophy and a descriptive research design. The target population comprised 14 regulated microfinance banks in Kenya, overseen by the Central Bank of Kenya (CBK). Secondary data, spanning from 2019 to 2023, was extracted using a data collection sheet and analyses with descriptive and inferential statistics via STATA. The findings indicated that collateral requirements had a positive impact on quality of loan portfolio of microfinance banks in Kenya. The findings underscore the importance of collateral requirements in enhancing loan portfolio quality. The study recommends that microfinance banks in Kenya should enhance their collateral requirement frameworks to improve loan portfolio quality, recognizing that collateral serves as both a security mechanism against default risk and an efficient screening tool for identifying creditworthy clients. Additionally, the Central Bank of Kenya should implement stricter oversight mechanisms on collateral valuation processes and establish standardized guidelines that ensure consistency across the sector while accommodating alternative collateral forms accessible to underserved populations. These evidence-based recommendations offer important guidance for policymakers and industry professionals in the microfinance sector, enriching the current knowledge base and driving improvements in risk management practices that balance institutional sustainability with financial inclusion objectives.
Keywords: Quality Loan Portfolio, Collateral Requirement, Microfinance Banks, Kenya
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