Lending Methods: A Financial Performance Determinant of Deposit -Taking Microfinance Institutions in Kenya

Abstract

The purpose of the study is to describe loan lending methods as a determinant of financial performance of deposit-taking Microfinance institutions (DTMFIs) in Kenya. The study sought to determine the financial cost implications of lending methods as
a key determinant of DTMFIs’ financial performance. The theories included capital structure, portfolio theory, the economic
theories (theory of choice, finance theory, capital investment theory, investor choice theory, preference theory and efficient capital market theory). The target population of the study was 138 DTMFIs in Kenya. The study had a total of 51 randomly sampled DTMFIs and purposively selected sample size of 102 which comprised of branch managers and finance officers working in the DTMFIs. Both qualitative and quantitative research design was employed where questionnaires were used to collect primary
data, and published reports quantified the secondary data. Data analysis and interpretation were based on descriptive statistics and measures of dispersion as well as inferential statistics mainly regression analysis, Pearson correlation, factor analysis,
ANOVA and Chi-square. From the study, it was evident that lending methods significantly enhanced the financial performance index by about 0.206 (p value=0.013). The study concluded that lending methods had a significant effect on the financial performance of DTMFIs in Kenya. It is recommended that unpopular lending methods by most customers, should be abolished.
The institutions need to invest more in research to discover new and innovative customer-friendly lending techniques to increase
the number of less labor loan portfolios in order to lower default rates, reduce costs and increase earnings. The regulator of the
DTMFIs should set uniform policies for all licensed DTMFIs in regard to educating clients before their engagement with the lender. This will enable DTMFIs to be able to withstand the market competition posed competitors. The study opens up the difficulties of operating as DTMFIs to the management and regulator.