Influence Of Non-accounting Information On Credit Decisions Of Microfinance Banks In Kenya

Abstract

This study assessed the influence of non-accounting information that is utilized by microfinance banks in making credit lending decisions. The objectives that guided this study included: to determine effect of credit history on credit decision making among microfinance banks in Kenya; to establish the influence of credit utilization on credit decision making among microfinance banks in Kenya; and to investigate how financial literacy influences credit decision making among microfinance banks in Kenya. The research was underpinned by four theories namely; equilibrium theory of credit rating, agency theory, theory of planned behaviour and decision making theory respectively. The study adopted a quantitative methodology in which case data was gathered using structured questionnaires. The study population was 169 staff comprising of credit sales officers, risk officers, credit managers and branch managers drawn from different Micro-Finance Bank head offices. A sample of 119 determined using Yamanes formula was selected using stratified random sampling, where the population was segregated into strata based on designation of the officers. In this study the main data collection instruments that were used were questionnaires which were carefully designed, tested and evaluated to assure validity of the primary data. Descriptive as well as inferential statistics were used by the study where the descriptive statistics were analysed in the form of frequency, percentages, mean, and standard deviation while the inferential statistics were analysed in the form of Spearman correlation and regression analysis. Tables, charts and graphs were used to present the analysed data. The descriptive results show that most micro finance banks have an internal credit rating system. Also, the results showed that microfinance banks have access to credit reference bureau reports which compile credit information, public record data and identity information. Furthermore, the microfinance banks are sometimes forced to monitor the investment made using loans to reduce diversion. The results further showed that loans meant for investments have low risk of defaults. In addition, it was shown that the clients with history of diverting the loan to non-productive investments are not approved for loans. Concerning new clients, the results showed new clients starting investments are required to provide business plan. The correlation analysis showed that credit history, credit utilization and financial literacy significantly and positively influence credit decision in microfinance banks in Kenya. These findings were confirmed by the regression analysis where credit history, credit utilization and financial literacy each registered a positive and significant beta coefficient. The study made the conclusion that financial literacy, credit utilization and credit history were very instrumental in credit decision making among the microfinance banks in Kenya. It is therefore recommended that microfinance banks keep information about both current and potential borrowers which may be useful on decisions concerning credit to customers. Also, credit utilization was found to be significantly related to credit decisions, thus microfinance banks should monitor whether the credit facility to the customers are used for the intended purpose and use this information for future decisions on credit worthiness of the potential borrower. On further studies, this study recommends that similar research be done using other variables to establish which other factors have impact on the credit decisions among microfinance banks in Kenya.