Contribution of micro credit loans on loan portfolio quality of deposit taking saccos in Kenya

Abstract

Savings and Credit Cooperatives were invented in German to promote savings and curb the exorbitant interest rates that was being charged to the indebted rural poor. Despite this nobble idea, micro credit loans portfolio performance has been declining. In Africa, SACCOs are facing challenges associated with asset quality. In Kenya, SACCOs equally face similar challenges that SACCOs are facing at global, continental and regional levels despite their importance in the Kenyan economy where they contribute at least 5.75% of the GDP. However, the Deposit Taking SACCOs have continued to record a lower Portfolio at Risk at 8.40% in 2022 compared to 13.80% for Commercial Banking Institutions and 31.78% for Microfinance banks in the same period. Even though the percentages of Portfolio at Risk in deposit taking saccos are the lowest in the financial sector, the figures of the loans written off are significant at 15.27, 19.38, 24.19, 34.05 and 36.95 billion from year 2018 to year 2022 respectively. Loan portfolio quality, the parameter that gives perspective of the overall loan performance, has experienced a deteriorating trend over the last decade. Portfolio at risk which measures loan quality also show a poor trend of 6.3%, 6.15%, 8.39%, 8.86% and 8.4% for the years 2018-2022 respectively. Existing literature commonly cover general DT Saccos portfolio, but with limited attention to Microcredit loan, as credit product accessed by over 76% of borrowers in Kenya. It is not known to what extent the microcredit loans are contributing to the recorded portfolio at risk of DT SACCOs in Kenya. This study hence sought to establish contribution of microcredit loans on loan portfolio quality of deposit taking Saccos in Kenya. Specifically, the study sought to determine the effect of micro credit loan lending terms on portfolio quality of deposit taking SACCOs in Kenya, establish the effect of member quality on portfolio quality in deposit taking SACCOs in Kenya, determine effect of credit risk management on micro credit loans portfolio quality in deposit taking SACCOs in Kenya and to evaluate the effect of management of information on microcredit loans portfolio quality in deposit taking SACCOs in Kenya. This study is anchored portfolio theory, credit risk theory balance score card theory and Information asymmetry theory. The study adopted a descriptive and correlational research design with a target population of 84 licensed Saccos using a purposive sampling technique consisting of identified DT Saccos which have micro credit loan as product. Respondents were one credit Managers in each DT Sacco. Primary data were collected using structured questionnaires. Response rate was 74%. Validity was assessed through expert opinion; reliability was ensured by doing pilot test in 10 Deposit Taking Saccos followed by a Cronbach’s test of 70% threshold. Findings revealed that micro credit loan lending terms, member quality, credit risk and information management positively and significantly influence portfolio quality of DT SACCOs in Kenya (p =0.000<0.05) and R2= 71.6%, 31.9%, 50.9% and 69.3% respectively. This imply that the four variables under consideration affects portfolio quality. The study concludes that DT SACCOs should consider favourable loan lending terms, proper background check to ensure members are of good quality at recruitment, continuous credit risk analysis and monitoring and a keen information management on microcredit loan products to ensure low delinquencies. The study recommends that a separate credit policy should be made specifically for microcredit loans.