CREDIT APPRAISAL TECHNIQUES AND ASSET QUALITY OF DEPOSIT TAKING MICROFINANCE INSTITUTIONS IN KENYA

Abstract

Deposit-taking microfinance institutions have maintained a pivotal role within Kenya’s financial sector by facilitating access to financial services, encouraging savings mobilization, and contributing to wealth generation. Considering the sector's significance in driving economic growth, substantial attention has been directed towards understanding the quality of their assets. This study aimed to explore how collateral evaluation and debt service coverage influence the asset quality of deposit-taking microfinance institutions in Kenya. Specifically, the study sought to examine the impact of collateral assessment and debt service coverage on asset quality. The research was grounded in the Lender-Based Theory of Collateralization and Credit Risk Theory. A panel technique and descriptive research design was used to determine the causal relationship between the variables in the study. The study utilized secondary data collected from annual reports covering the period from 2019 to 2023. The target population constituted the 12 Deposit Taking MFIs operating in Kenya. The census method was applied to select all the DT MFIs in Kenya for a period of five years beginning 2019 to 2023. Data analysis for this investigation was conducted utilizing descriptive and inferential statistical methodologies, encompassing techniques such as the Pearson correlation coefficient and regression analysis. The study concluded that collateral evaluation (β = 0.055, p = 0.015) and debt service coverage (β = 0.132, p = 0.000) significantly and positively impacted asset quality of deposit taking microfinance institutions in Kenya. Based on the findings, it is recommended that deposit-taking microfinance institutions strengthen collateral valuation procedures and enhance debt service assessment frameworks to improve asset quality and reduce non-performing loans.

Key Words: Collateral Evaluation, Debt Service Coverage, Asset Quality, Deposit-Taking Microfinance Institutions, Non-Performing Loans, Credit Appraisal Techniques, Kenya