TITLE :FACTORS INFLUENCING LOAN REPAYMENT AMONG MICROFINANCE

LOANCONSUMERS IN HOMA-BAY COUNTY,,KENYA.

PRESENTED BY:AWINO VERONICA VIDAH.

INDEX NUMBER: 6161030481

COURSE NAME: DIPLOMA INBANKING AND FINANCE.

CENTRE NAME:SIGALAGALA NATIONAL POLYTECHNIC

SUPERVISOR:MR ISAIAH OKETCH

COURSE CODE: 2805

EXAM SERIES: NOVEMBER SERIES

PRESENTED TO: THEKENYA NATIONALEXAMINATION COUNCIL FOR

PARTIALFULFILMENT FOR THE AWARD OF DIPLOMA IN BANKING AND

FINANCE.
DECLARATION
This research is my original work and has not been presented for an academic award or any

purpose in any other institution.

Signature: ........................................... Date: ......................................

Awino Veronica Vidah

The supervisor has approved the project for presentation to the Kenya National Examination

Council

Signature: ......................................... Date: ...........................................

Mr. Isaiah Oketch

i
DEDICATION

To my loving parents Hellen and Eusebius.

ii
ACKNOWLEDGEMENT

I thank the Almighty God for seeing me safely through my course. May all glory and honor

be to His holy name. My special appreciation goes to my supervisor, Mr. Isaiah Oketch, for

his guidance, support, advice, and encouragement. My gratitude to the Sigalagala National

Polytechnic for the opportunity accorded and my lectures for their tireless commitment and

support. I thank my parents Eusebius and Hellen, for their encouragement, support, and

enabling environment. Sincere thanks to my brothers, sisters, Dennis, and friends for their

input throughout the project.

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Table of Contents
DECLARATION........................................................................................................................i
DEDICATION..........................................................................................................................ii
ACKNOWLEDGEMENT........................................................................................................iii
ABSTRACT............................................................................................................................vii
CHAPTER ONE...................................................................................................................- 1 -
1. INTRODUCTION.........................................................................................................- 1 -
1.1. Background to the Study........................................................................................- 1 -
1.2. Statement of the Problem.......................................................................................- 2 -
1.3. Purpose of the Study..............................................................................................- 3 -
1.4. Objectives of the Study...........................................................................................- 3 -
1.5. Research Questions................................................................................................- 3 -
1.6. Research Hypothesis..............................................................................................- 4 -
1.7. Significance of the Study........................................................................................- 4 -
1.8. Limitations of the Study.........................................................................................- 5 -
1.9. Assumptions of the Study.......................................................................................- 5 -
CHAPTER TWO..................................................................................................................- 6 -
2. LITERATURE REVIEW..............................................................................................- 6 -
2.1. Introduction...........................................................................................................- 6 -
2.2. Loan Repayment....................................................................................................- 6 -
2.3. Demographic Characteristics and Loan Repayment...............................................- 7 -
2.4. Utilization of Loan Funds and Loan Repayment.....................................................- 7 -
2.5. Repayment Plan and Loan Repayment...................................................................- 8 -
2.6. Supervision and Loan Repayment..........................................................................- 9 -
2.7. Theoretical Framework..........................................................................................- 9 -
2.8. Conceptual Framework........................................................................................- 10 -
2.9. Summary of the Literature Review.......................................................................- 11 -
CHAPTER THREE............................................................................................................- 12 -
3. RESEARCH METHODOLOGY.................................................................................- 12 -
3.1. Study Area...........................................................................................................- 12 -
3.2. Research Design...................................................................................................- 12 -
3.3. Study Population..................................................................................................- 12 -
3.4. Sampling and Sampling Procedures.....................................................................- 12 -
3.5. Data Collection.....................................................................................................- 13 -
3.6. Data Analysis.......................................................................................................- 13 -

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 3.7. Ethical Consideration...........................................................................................- 13 -
CHAPTER FOUR..............................................................................................................- 15 -
4. RESULTS AND DISCUSSION....................................................................................- 15 -
4.1. Questionnaire Response Rate...............................................................................- 15 -
4.2. Characteristics of Participants.............................................................................- 15 -
4.3. Overall Loan Repayment Status...........................................................................- 16 -
4.4. The Influence of Demographic Characteristics on Loan Repayment.....................- 17 -
4.4.1. Age...............................................................................................................- 17 -
4.4.2. Gender..........................................................................................................- 18 -
4.4.3. Marital Status...............................................................................................- 18 -
4.4.4. Income Level.................................................................................................- 19 -
4.5. Loan Repayment Plan..........................................................................................- 20 -
4.6. Utilization of Loan Funds.....................................................................................- 21 -
4.7. Supervision and Loan Repayment........................................................................- 22 -
CHAPTER FIVE................................................................................................................- 24 -
5. SUMMARY OF FINDINGS, CONCLUSIONS, AND RECOMMENDATION.............- 24 -
5.1. Summary.............................................................................................................- 24 -
5.2. Conclusion...........................................................................................................- 26 -
5.3. Recommendations................................................................................................- 27 -
REFERENCES...................................................................................................................- 28 -

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List of Tables

Table 1:The Demographic Characteristics of Participants.........................................................- 16 -

Table 2: Impact of Age on Loan Repayment...........................................................................- 17 -
Table 3: Impact of Gender on Loan Repayment.......................................................................- 18 -
Table 4: Impact of Marital Status on Loan Repayment.............................................................- 19 -
Table 5: The Impact of Income on Loan Repayment................................................................- 19 -
Table 6: Effect of Loan Repayment Period on Loan Repayment...............................................- 20 -
Table 7: Impact of Payment Frequency on Loan Repayment....................................................- 21 -
Table 8: Utilization of Loan Funds and Loan Repayment.........................................................- 22 -
Table 9: Impact of Supervision on Loan Repayment................................................................- 23 -

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ABSTRACT

Microfinance institutions aim to improve the living standards of the poor by providing

loans to those who do not qualify for conventional loans provided by traditional banks.

Default is a significant challenge experienced by these lending institutions. This study aimed

to assess the influence of borrowers' demographic characteristics, loan repayment plans,

supervision, and utilization of loan funds on loan repayment among microfinance consumers

in Homa-Bay County.

The authors used a crossectional study design. The study was Conducted in Homa-

Bay County, Kenya. The study population was microfinance loan consumers in Homa-Bay

Town, specifically Wavuvi SACCO. Data were collected using a structured questionnaire.

Stratified random sampling was used in the study. Data were analyzed using descriptive and

analytic statistics. Chi-square was used to assess the association between variables and loan

repayment status. The p-value was set at 0.05. All data were analyzed using SPSS version 26.

One hundred and twenty questionnaires were administered to microfinance loan

consumers in Homa- Bay County. Ninety (75%) participants returned their duly filled

questionnaires. The overall default rates were 62.2%. The default rates were highest among

borrowers aged 30-39 years (84.6%), males (69%), single borrowers (84.2%), and those

earning less than KSH. 5,000 (73.9%). The default rates were high among borrowers whose

loan plans were fixed to less than a year (82.5%), who paid their loans monthly (65.3%),

those who used their loans for unintended purposes (69.9%), and those who lacked

supervision (75.7%). Loan repayment was only associated with the level of income (p =

0.049), the duration of repayment plans (p = 0.013), and supervision (0.001).

In conclusion, assessing clients' loan repayment capacity based on their income,

providing supervision before and after loan repayment, and formulating flexible loan

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repayment plans are crucial to ensuring the sustainability of the microfinance institutions in

Kenya.

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CHAPTER ONE

1. INTRODUCTION

1.1. Background to the Study

The main aim of microfinance institutions is to improve the living standards of the

poor. Microfinance institutions have achieved this by providing loans to those who do not

qualify for conventional loans provided by traditional banks. The poor are excluded from

credit facilities because they have insufficient collaterals to support their loans, unstable

incomes, and low literacy. Therefore, they survive through involvement in microbusiness

activities or informal employment opportunities such as food processing, small-scale

agriculture, and small-scale businesses. As a result, the poor have continued to languish in a

vicious cycle of poverty following banks' constant denial of vital capital.

Various organizations and authors have provided different definitions of

microfinance. The World Bank defines microfinance as small-scale financial services,

primarily credits and saving provided to farmers, people who fish, or those who operate small

scale businesses or micro-enterprises where goods are provided, recycled, and sold and those

who work for wages or commission at the local level of developing countries, at both rural

and urban areas. Nawai and Shariff (2010) argued that microfinance institutions were

established to fill the gap in the financial service sector by providing funds to the poor and

low-income groups, thus, alleviating poverty and enhancing their business activities.

Even though loans have continued to pose numerous challenges, clients continue to

go against all odds and repay their loans even with difficulties. In some cases, clients have

failed to pay their loans. Failure to pay loans leads to serious consequences such as losing

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their credit rating and confiscating valuable assets by microfinance institutions. In cases

where members are organized into groups to provide loan security, default by one member

leads to condemnation of the entire group. Therefore, clients and microfinance institutions

incur significant losses from loan defaults. However, some measures can be implemented to

optimize loan repayment. These strategies include using loan funds for intended purposes,

consumer education, flexible loan repayment plans, and supervision. This study analysis

shows how loan repayment and default are associated with various institutional factors and

personal, social, and economic characteristics of loan consumers. The findings of this study

provide information necessary to give measures that microfinance institutions should

implement to improve loan repayment.

1.2. Statement of the Problem

For any lending institution to continue providing services, it must sustain and ensure a

defined loan collection is adequate to meet its recurrent expenditure. A default rate exceeding

3% poses a threat to the profitability and capital of any lending institution. A manager of a

microfinance institution indicated that the default rate stands at about 30% during an informal

interview.

Systematic credit is a significant challenge against the profitability of microfinance

institutions. Clients' challenges contributing to the high default rates include lack of

understanding of microfinance concepts, communication gaps, and lack of standardized

performance monitoring systems.

Lack of supervision has been a significant contributor to loan repayment problems

among microfinance consumers. Respondents indicated that supervision contributes to

payment defaults because of lack of follow-up on how they are utilizing their loans,

inadequate visits by loan officers, and lack of advice on strategies to mitigate loan repayment

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challenges. Lack of supervision also perpetuates a view among some consumers that the

loans are gifts that do not need to be repaid.

1.3. Purpose of the Study

This study aims to investigate factors influencing loan repayment among

microfinance loan consumers in Homa-Bay County.

1.4. Objectives of the Study

This study aims to investigate factors influencing loan repayment among

microfinance loan consumers in Homa-Bay County. The objectives of the study are:

1) To assess the influence of supervision on loan repayment among microfinance loan

consumers in Homa-Bay County.

2) To assess the impact of utilization of loan funds on loan repayment among

microfinance loan consumers in Homa-Bay County.

3) To examine the influence of borrowers' demographic characteristics on loan

repayment among microfinance loan consumers in Homa-Bay County.

4) To assess the impact of loan repayment plans on loan repayment among microfinance

loan consumers in Homa-Bay County.

1.5. Research Questions

The study aims to answer the following research questions

1) To what extent does supervision influence loan repayment among microfinance loan

consumers in Homa-Bay County?

2) To what extent does utilization of loan funds influence loan repayment among

microfinance loan consumers in Homa-Bay County?

3) To what extent do borrowers' demographic characteristics influence loan repayment

among microfinance loan consumers in Homa-Bay County?

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 4) To what extent do loan repayment plans on loan repayment among microfinance loan

consumers in Homa-Bay County?

1.6. Research Hypothesis

The hypotheses of the study are:

1) There is a relationship between supervision and loan repayment among microfinance

loan consumers in Homa-Bay County?

2) There is a relationship between the utilization of loan funds and loan repayment

among microfinance loan consumers in Homa-Bay County?

3) There is a relationship between borrowers' demographic characteristics and loan

repayment among microfinance loan consumers in Homa-Bay County?

4) There is a relationship between loan repayment plans on loan repayment among

microfinance loan consumers in Homa-Bay County?

1.7. Significance of the Study

Microfinance institutions must function in a manner to meet their financial obligations

to prosper. Poor loan collection and repayment have been the biggest challenge for

microfinance institutions. These deficiencies have threatened the survival of microfinance

institutions and the living standards of the clients. The latter is particularly in cases when the

lending institutions impound collaterals of the client.

This unacceptable state of affairs has been contributed to by either the absence or poor

observation of policies regarding borrowed loans, unprofitable utilization of loan funds,

hostile loan repayment plans, and lack of supervision. The findings of this study will provide

evidence on the factors influencing loan repayment among microfinance loan consumers in

Homa-Bay County. Consequently, these findings will help policymakers and microfinance

institutions improve policies and loan repayment plans so that loans are only allocated to

eligible clients. The results will also help in identifying and aiding follow-up measures to

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minimize loan default rates. Finally, the study will also contribute to filling the knowledge

gap existing in the study area.

1.8. Limitations of the Study

There is limited evidence on the research topic. Consequently, there is no available

research that could help clarify the problem. The available literature addresses this problem in

other counties and may not apply to the population of Homa-Bay County.

The researcher could not administer the questionnaires single-handedly because of

time constraints. The time constraint also limited the researcher from taking all the clients

through the questionnaire. To address this limitation, research assistants helped in data

collection during group meetings.

The researcher had difficulty recruiting enough respondents per group. This challenge

resulted from the fact that only a few group members attended their respective group

meetings. As a result, the researcher collected data from only available group members.

1.9. Assumptions of the Study

One of the assumptions of the study is that respondents gave accurate and truthful

information. Participation in this study was voluntary. As a result, it is assumed that the

participants were not coerced or felt intimidated by providing information that may put them

in bad light with the lender. The study also assumes that the sample was representative of the

population of interest.

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CHAPTER TWO

2. LITERATURE REVIEW

2.1. Introduction

Significant studies on microfinance institutions, their contribution to development,

and factors influencing loan repayments have been studied. There is a need to screen loan

applicants to assess their creditworthiness, understanding of proper utilization of loans, the

necessity of flexible financing plans, and supervision. This view is supported byAddae-

Korankye(2014), who argued that gathering and clarifying information on clients is critical in

determining the creditworthiness of borrowers.

The contents of this section include loan repayment and default. Also, this chapter addresses

the impact of borrowers' demographic characteristics, loan utilization, loan repayment plan,

and supervision on microfinance loan repayment.

2.2. Loan Repayment

A loan is money provided in the form of a debit by a lending institution to another

institution or a person. The borrower is expected to pay back the principal plus the interest

periodically. The lending institution and the borrower agree on the repayment terms. The

payback of the interest and principal within the agreed period is referred to as repayment. On

the contrary, a loan whose payment of both principal and interest delays by more than 90

days has defaulted.

Formal banking institutions deny poor clients' loans because they have no reliable

income or collateral to secure loans. Because the primary goal of microfinance institutions is

to serve the poor, a criterion for selecting viable loan beneficiaries must be put in place to

minimize loan defaults. Clients must invest loans in activities generating income or capital to

6
ensure enough reserve for loan repayment. Institution factors that may hinder loan repayment

should be investigated and addressed to ensure optimal repayment.

2.3. Demographic Characteristics and Loan Repayment

Kosen (2013) argued that demographic characteristics include age, sex, level of

income, education, homeownership, and employment status. Demographic profiling is

essential in microfinance institutions because it informs selection and tailoring services to

align with the demographic characteristics of the target group. Demographic characteristics

may also show the risk level of a particular individual as it determines how clients will make

financial decisions and their ability to save.

Gebremedhin (2010) reported that the effect of age on loan repayment could not be

readily predetermined. However, many young people may be educated and better informed

on loan repayment plans, default implications, and income-generating activities such as

business or farming. Kosen (2013) reported that young borrowers aged between 20-34 years

and those aged 55 years and above have a minimal rate of loan delays beyond 30 days.

However, clients aged between 35-55 years have higher rates of loan defaults because of

many family responsibilities, which compete will loan repayment obligations. Education

level influences loan repayment. Highly educated borrowers can comprehend more complex

information, keep business records, conduct fundamental cash flow analysis, and make

informed business decisions, translating to higher repayment rates. Family size affects loan

repayment. Larger households have higher household expenses which may adversely affect

loan repayment. As a result, loans are more likely to be diverted to unintended purposes to

meet the needs of the family members, contrary to small-sized families.

2.4. Utilization of Loan Funds and Loan Repayment

Borrowers who use loan funds for the intended purposes are least likely to default in

repayment. Diversion of loan funds to unproductive purposes may be unintended and

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inevitable. Khaleque (2010) reported that poverty, illness of self or dependents, education

needs of children, and unemployment of borrower or spouse were the significant precipitators

of diverting leans for unintended purposes.

Screening of potential borrowers to verify information provided by clients may

prolong the loan processing duration. Addae-Korankye (2014)insists that a longer loan

processing duration allows credit officers to assess the chances, threats, and risks affecting

clients' economic activities before disbursement of funds. However, delays in the

disbursement of funds may lead to the late purchase of inputs and possibly substantial

financial losses because of markets dynamics and prevailing environmental factors.

Therefore, loans should be disbursed timely because the profitability of investment greatly

relies on the timing.

2.5. Repayment Plan and Loan Repayment

A repayment plan refers to the entire period in which the principal and interest will be

paid and the repayment schedule for the designated period. Some loan repayment periods are

as short as six months, while others may take two years.

A study conducted in Malaysia by Mokhtar et al. (2012) showed that borrowers face

significant loan repayment problems if their loan repayment duration is less than a year

compared to those whose loans repayment period extends beyond a year. Therefore, the

longer the loan repayment duration correlates with lower default rates. More extended

repayment periods allow borrowers time to acquire the necessary resources to pay their loans.

However, long loan repayment periods may result in loan repayment fatigue. Also, loan

repayment pals should be flexible and adapted to clients' flow over a minimum period of one

year and a maximum of three years has the potential to cushion clients against eventualities

and loan repayment fatigue, both of which increase loan default rates.

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 2.6. Supervision and Loan Repayment

Supervision comprises communication between the lender and the borrower by either

direct physical contact, written communication, or phone. Communication can be done before

and after loan disbursement. Supervision is provided for advising the borrower, assessing the

borrower's utilization of funds, or following up because of loan default.

Addae-Korankye (2014) pointed that supervision is essential because it enables the lender to

verify information provided by borrowers, enabling them to detect falsified or doctored

information. Supervision facilitates monitoring deposits on investments relative to the

available balance. Supervision shows interest in the borrower and may aid in the early

identification of warning indicators of possible defaults and implementing strategies to

prevent the default.

2.7. Theoretical Framework

Signaling theory, adverse selection theory, and pricing theory provided the theoretical

framework for this study. The signaling theory postulates that individuals may give honest or

dishonest opinions about themselves. The signaling theory is relevant for this study because it

encourages lending institutions to verify client information because some clients may send

deceptive signals for their gain. For example, a client who accepts high premium and offers

high cast collaterals when presenting a business plan which indicates a minimal low return on

investment is possibly signaling high cash flows and returns.

Adverse selection is necessitated by the signaling theory (Kosen, 2013). The two main

assumptions are lenders cannot draw a cut line between borrowers' different risks, and loan

contracts are subject to limited liability. Lending institutions are at high risk of moral hazard,

especially when clients' collateral equipment is low or whose legal system gives limited

power to financial institutions to enforce contracts. However, excessive demand on the

provision of collateral would lock out the poor from accessing microcredit. Adverse selection

9
can be addressed by collecting demographic data from clients and adopting strict enforcement

of contracts (Kosen, 2013).

The pricing theory postulates that the costs of processing a loan are transferred to the

borrower. These costs include regular search costs, background checks, investigations into

the current financial status of the borrower, authenticating collaterals, processing of

application forms, and disbursement costs. All the costs attract a fixed fee that is factored in

the interest the borrower must pay. The theory's most significant concern to microfinance

institutions is the high interest rates occasioned by the high operational cost.

2.8. Conceptual Framework

A conceptual framework is the graphical representation of the relationship among

factors being explored in research. The independent variables of this study are clients'

demographic characteristics, loan utilization, supervision, and loan repayment plans. The

outcome of this study is the dependent (outcome) variable for this study. The conceptual

framework of the study is shown in Figure 1.

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Figure 1: The Conceptual Framework for the Project

2.9. Summary of the Literature Review

Loan repayment is the payback of interest and principal by loan consumers within the

stipulated time. Default refers to delay in paying the loan for a period extending to or beyond

90 days beyond the stipulated time. Clients' demographic characteristics, loan repayment

plan, utilization of loan funds, and supervision influence loan repayment. Signaling theory,

adverse selection, and pricing theory provided the theoretical framework for this study.

11
CHAPTER THREE

3. RESEARCH METHODOLOGY

3.1. Study Area

The study was Conducted in Homa-Bay County, Kenya. The county is located in the

southern part of the former Nyanza Province. Homa Bay County has a population of

1,131,950. The county covers a geographical area of 3,154.7 km2. The county has eight sub-

counties.

3.2. Research Design

The researcher used a crossectional study design. In a crossectional study design, the

researcher collects data on both the independent variables and outcome variables at the same

point in time. As a result, the researcher collected data on participants' demographics, loan

repayment plan, supervision, utilization of loan funds, and loan repayment status at the same

time. This study design was selected because it is cheap, convenient, and fast.

3.3. Study Population

The study population was microfinance loan consumers in Homa-Bay Town,

specifically Wavuvi SACCO. This SACCO was established in 2015 to provide loans to

fishers in Homa-Bay County. As of January 2021, Wavuvi SACCO has 170 members. The

Members were distributed across six estates in Homa-Bay: Makongeni, Shauri Yako, Site,

Sofia, Mbuni, and Kochia.

3.4. Sampling and Sampling Procedures

At a confidence interval of 95%, a margin error of 5%, and a population proportion of

50%, a sample frame of 119 participants was required for the study. Potential participants

were first divided into six strata based on their resident estate, and 20 persons were randomly

selected from each cluster.

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 3.5. Data Collection

Data were collected using a structured questionnaire. The questionnaire had four

sections. These sections collected data on participants' demographic characteristics, loan

repayment plan, lender supervision practices, utilization of loan funds, and loan repayment

practices. The questionnaire had both closed and open-ended questions. The questionnaire

was reviewed by two independent financial analysts for face and content validity. Data was

collected over three weeks. The researcher approached potential participants during their

weekly group meetings, highlighted the purpose of the study, obtained informed consent, and

distributed the questionnaire to group members. Participants were then given three hours to

complete and submit the questionnaire to the researcher or research assistants.

3.6. Data Analysis

All data were analyzed using SPSS version 26. All data was validated, and incomplete

data and duplicates were eliminated. Data were analyzed using descriptive and inferential

statistics. Categorical variables including age, gender, the highest level of education, marital

status, income, loan repayment duration, loan repayment frequency, utilization of loan funds,

supervision, and loan repayment status were analyzed as proportions. Continuous variables

were presented as mean±standard error of the mean. Chi-square was used to check if there

were any statistically significant differences between categorical variables. The p-value was

set at <0.05. Data for the variables were presented in frequency distribution tables.

3.7. Ethical Consideration

All study participants provided written informed consent. The researcher took

numerous initiatives to protect the privacy, confidentiality, and security of data. No

participant identifying information or unique identification was used in the study, and

questionnaires were only be numbered randomly to promote data extraction. Data were

analyzed and reported as a group as opposed to individual responses. All completed

13
questionnaires were placed in a folder and locked in a cabinet, and the researcher and

research assistants had access to the questionnaires. Questionnaires were shredded after data

analysis and verification.

14
CHAPTER FOUR

4. RESULTS AND DISCUSSION

4.1. Questionnaire Response Rate

One hundred and twenty questionnaires were administered to microfinance loan

consumers in Homa- Bay County. Ninety (75%) participants returned their duly filled

questionnaires, 11 (9.2%) were incomplete, and 19 (15.8%) of participants did not return

their questionnaires. Mugenda and Mugenda (2003) provided an acceptable threshold of 70%

and above, indicating that this study had an optimal questionnaire response rate. Only data

from complete questionnaires were analyzed in this study.

4.2. Characteristics of Participants

The study participants were composed of 29 (32.2) males and 61 (67.8%) females.

The majority of the respondents (43.3%) were aged between 30-39 years, 25.6% between 40-

49 years, 18.9% between 20-29, 7.8% between 50-59 years, and 4.4% were older than 60

years. Most participants' highest level of education (52.2) was primary level, and only 2.2%

had a bachelor's degree. A total of 75.6% were married, 21.1% were single, and 3.3% were

widowers or widows. Almost half (48.9) of participants were earning between KSH. 5,000-

10,000. The demographic characteristics of participants are summarised in Table 1.

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Table 1:The Demographic Characteristics of Participants
C a t e g o r y F r e q u e n c y P e r c e n t ( % )
G e n d e r
Male 29 32.2
Female 61 67.8

A g e ( y e a r s )
20-29 17 18.9
30- 39 39 43.3
40-49 23 25.6
50-59 7 7.8
≥ 60 4 4.4

Highest Level of Education

None 7 7.8
Primary 47 52.2
Vocational training 3 3.3
Secondary 19 21.2
Diploma/certificate 12 13.3
Degree 2 2.2

M a r i t a l S t a t u s
Single 19 21.1
Married 68 75.6
Divorced/separated 0 0
Widow/widower 3 3.3

Monthly Income (KSH)

<5000 23 25.6
5001-10000 44 48.9
10,001-15,000 19 21.1
>15000 4 4.4

4.3. Overall Loan Repayment Status

The loan default rates among the participants were very high. Among the 90

respondents, 56 (62.2) had defaulted on their current loan, and only 34 (37.8%) had been

16
paying their loans as scheduled. These results are similar to those of Munene et al. (2013),

who reported a default rate among microfinance consumers in Imenti North District.

4.4. The Influence of Demographic Characteristics on Loan Repayment

4.4.1. Age

The majority of the respondents (43.3%) were aged between 30-39 years, 25.6%

between 40-49 years, 18.9% between 20-29, 7.8% between 50-59 years, and 4.4% were older

than 60 years. Borrowers aged 30-39 years, 40-49 years, and 20-29 years at loan default rates

of 84.6%, 56.6%, and 52.6%, respectively, had the highest default rate compared to

borrowers aged between 50-59 and older than 60 years whose default rates were only 14.3%

and zero, respectively (Table 2). Default rates are possibly higher among persons aged

between 30-49 years, possibly because they possibly have school-going children while most

of 20-29 years are probably in colleges or are unemployed. However, the default rates may be

lower in persons older than 50 years, possibly because they may have few or no school-going

children or were being boosted financially with their children. However, chi-square analysis

showed no significant association between participants' age and default rates (p = 0.12). The

findings of this study are congruent with those of Kosen (2013), who reported that most loan

defaulters were aged between 20-50 years and had no association between age and default

rates.

Table 2: Impact of Age on Loan Repayment

N o n - d e f a u l t e r s D e f a u l t P-value

Characteristic F r e q . P e r c e n t a g e F r e q . Percentage

17
 A g e
20-29 8 47.1 9 52.9
30- 39 6 15.4 33 84.6 0.12
40-49 10 43.4 13 56.6
50-59 6 85.7 1 14.3
≥ 60 4 100 0 0

T o t a l 3 4 5 6

4.4.2. Gender
This study aimed to assess the effect of gender on loan repayment among

microfinance loan consumers in Homa-Bay County. Twenty-nine (32.2%) participants were

males, and 61 (67.8%) were females. About 31% and 69% of males were non-defaulters and

defaulters, respectively, while 41.9% and 58.1% of women were non-defaulters and

defaulters, respectively (Table 3). Consequently, default rates were higher in males than

females. Women are less likely to default than men, possibly because they are involved in

many social groups and are likely to yield to coercive loan enforcement methods compared to

men. However, the p-value was 0.963, indicating no association between gender and loan

repayment status.

Table 3: Impact of Gender on Loan Repayment

N o n - d e f a u l t e r s D e f a u l t P-value

Characteristic F r e q . P e r c e n t a g e F r e q . Percentage

G e n d e r
Male 9 31.0 20 69 0.963
Female 25 41.9 36 58.1

T o t a l 3 4 5 6

18
 4.4.3. Marital Status

A total of 68 (75.6%) were married, 19 (21.1%) were single, and 3 (3.3%) were

widowers or widows. The default rates were highest among single and married participants

whose default rates were 84.2% and 55.9%, respectively, compared to widowed/ widowers

whose default rate was 33.3% (Table 4). The default rates were low among the widowed,

probably because they were only three participants. Haile (2015) argued that default rates are

low among married than single borrowers because they probably have more resources

because of the pooling of funds in families. However, the chi-square test showed no

association between marital status and loan repayment status (p = 0.317).

Table 4: Impact of Marital Status on Loan Repayment

Non-defaulters D e f a u l t P-value

Characteristic F r e q . Percentage F r e q . Percentage

Marital Status
Single 3 15.8 16 84.2 0.317
Married 30 44.1 38 55.9
Divorced/separated 0 0 0 0
Widower/widowed 2 67.2 1 33.3
T o t a l 3 4 5 6

4.4.4. Income Level

Forty-four (48.9%) of participants had a monthly income of KSH. 5001-10,000.

Twenty-three participants (25.6%) earned less than KSH.5,000, and 4 (4.4%) earned more

than KSH. 15,000. The remaining 19 (21.1%) earned between KSH. 10,001 and 15,000.

There was a direct correlation between income and loan repayment status (Table5). The loan

default rates were 73.9% for less than KSH.5000, 68.2% for KSH. 5,001-10,000, 42.1% for

KSH. 10,001-15,000, and 25% for more than KSH. 15,000. Chi-square analysis showed a

19
statistically significant association between the income level and loan repayment status

(0.049).

Table 5: The Impact of Income on Loan Repayment

Non-defaulters D e f a u l t P-value

Characteristic F r e q . Percentage F r e q . Percentage

Monthly Income (KSH)

<5000 6 26.1 17 73.9 0.049
5,001 -10,000 14 31.8 30 68.2
10,001-15,000 11 57.9 8 42.1
>15000 3 75 1 25
T o t a l 3 4 5 6

4.5. Loan Repayment Plan

Fifty-seven (63.3%) and 33 (36.7%) of participants had loan repayment plans of less

than one year and more than one year, respectively. The default rates were 82.5% and 27.3%

among participants in the two groups, respectively (Table 6). Chi-square analysis showed that

there was a statistically significant association between loan repayment duration and loan

repayment status. These results are similar to those of Mokhtar et al. (2012), who reported

that loan repayment periods beyond 12 months are associated with lower default rates. Loan

repayments longer than one year may make monthly premiums cheaper and affordable, thus

reducing default rates. On the contrary, shorter loan payment durations may have high

monthly payments leaving borrowers with fewer resources, translating to high default rates.

More extended plans may predispose borrowers to unpredictable forces in the marketplace.

Table 6: Effect of Loan Repayment Period on Loan Repayment

N o n - d e f a u l t e r s D e f a u l t P-value

Characteristic F r e q . Percentage F r e q . Percentage

20
 Loan Repayment Period
One year or less 10 17.5 47 82.5 0.013
More than one year 24 72.7 19 27.3

T o t a l 3 4 5 6

Out of the 90 respondents, 49 (54.4%) paid their loans monthly, 27 (30%) paid every

two weeks, and 14 (15.6%) paid weekly. The loan default rates were highest among those

who paid monthly (65.3%), followed by every two weeks (63%), and least among those who

paid weekly (50%), as shown in Table 7. However, there was no association between loan

repayment frequencies and default rates (p= 0.649). As a result, repayment frequencies

should be based on a person's ability to repay the borrowed amount.

Table 7: Impact of Payment Frequency on Loan Repayment

Non-defaulters D e f a u l t P-value

Characteristic F r e q . Percentage F r e q . Percentage

Loan Repayment Frequency

Weekly
Two weeks 7 50 7 50
Monthly 10 37.0 17 63 0.679
17 34.7 32 65.3

T o t a l 3 4 5 6

4.6. Utilization of Loan Funds

This study aimed to assess the impact of the utilization of loan funds on loan repayment.

Seventy-seven (85.6%) and 13 (14.4%) reported using their loans for intended and

unintended purposes, respectively. The loan default rate was 61.0% and 69.9% for those who

used loan funds for intended and unintended purposes (Table 8). These findings are different

21
from those of Negese and Pasha (2014), who reported that the default rates were high among

those who used loans for unintended purposes. These differences can be attributed to the

study population having fewer (14.4%) participants who used loans for unintended purposes.

Chi-square analysis indicated no statistically significant association between loan utilization

and loan repayment status (p = 0.536). Similarly, Negese and Pasha (2014) found no

association between the utilization of loan funds and loan repayment. Khaleque (2010) argues

that the diversion of loans for unintended purposes is not a serious problem as long as they

are diverted to productive activities.

Table 8: Utilization of Loan Funds and Loan Repayment

Non-defaulters D e f a u l t P-value

C h a r a c t e r i s t i c Freq. Percentage F r e q . Percentage

Utilization of Loans
Intended purposes 30 39.0 47 61.0 0.536
Unintended purposes 4 30.1 9 69.9

T o t a l 3 4 5 6

4.7. Supervision and Loan Repayment

Only 37 (41.1%) participants indicated that they have ever been visited or received

any call or written communication from their loan officer, and 53 (58.9%) of participants

denied any visit, calls, or written communication from their lender. The default rates were

88.7% and 24.3% of participants who did not and those who received supervision,

respectively (Table 9). On the contrary, 11.3% and 75.7% of participants who did not and

those who received supervision paid their loans on time. Chi-square analysis indicated a

statistically significant association between supervision and loan repayment status (p=0.001).

22
The impact of supervision on loan repayment status is probably because it facilitated

verification of participants' information, identification of possible defaults, adjustment of loan

repayment plans, and consumer training during follow-up (Addae-Korankye, 2014).

Table 9: Impact of Supervision on Loan Repayment

Non-defaulters D e f a u l t P-value

Characteristic F r e q . Percentage F r e q . Percentage

S u p e r v i s i o n
Supervised 28 75.7 9 24.3 0.001
Not supervised 6 11.3 47 88.7

T o t a l 3 4 5 6

23
CHAPTER FIVE

5. SUMMARY OF FINDINGS, CONCLUSIONS, AND RECOMMENDATION

5.1. Summary

Microfinance institutions are viable secondary sources of loans for small-scale

businesses and the poor who cannot receive funding from traditional banks. However, loan

default is the major challenge faced by these lending institutions. This study highlighted this

issue because 62.2% of microfinance loan consumers had defaulted on their loans. The

researcher hypothesized that participants' demographic characteristics, loan repayment plans,

utilization of loan funds, and supervision were the primary determinant of loan repayment

among microfinance institutions in Homa-Bay County.

The researcher assessed the impact of participants' age, gender, marital status, and

income level on loan repayment. the results indicated that the default rate was highest among

borrowers aged 20-49 years, male borrowers, single borrowers, and those who earn less than

KSH. 5,000 per month. However, there was only a significant association between income

and loan repayment (p = 0.049). However, the researcher found no association between loan

repayment and participants' age, gender, and marital status as the p-value for these variables

were 0.12, 0.963, and 0.317, respectively. These results show that all demographic

characteristics of borrowers do not influence loan repayment status.

Loan utilization has been considered an essential determinant of loan repayment. In

this study, most borrowers (85.6%) used their loans for intended purposes. However, the

default rate among those who used loans for intended and unintended purposes was not

24
statistically significant as the p-value was 0.536. consequently, the study's findings found that

loan fund utilization does not influence loan repayment as borrowers may as well invest loans

in alternative productive and income-generating activities. Therefore, the use of loans for

intended purposes does not lead to better loan repayment.

The loan repayment plan was hypothesized to influence loan repayment. The

researcher assessed the influence of long payment duration and frequency on loan repayment.

The authors found that the default was highest for loan payment duration of less than one

year (82.5%) compared to more than a year (27.3%). The default rates were also highest

among those who paid their loans monthly (65.3%), followed by every two weeks (63%), and

least among those who paid their loans weekly (50%). However, there was only a positive

correlation between loan repayment duration and repayment status (p = 0.013) but not

between payment frequency and loan repayment status (p = 0.679). Therefore, the payment

duration is the most crucial aspect of a payment plan that affects loan payment status.

Finally, the study aimed to evaluate the impact of supervision on loan repayment.

Participants were asked if they have ever received any visits, telephone calls, or written

communication from their lender or loan officer. Only 41.1% reported any form of

supervision, and 58.9% reported not receiving any supervision. The loan default rates were

higher among those who did not receive supervision (88.7%) than those who received no

supervision (41.1%). There was a statistically significant association between supervision and

loan repayment as the p-value was 0.001. These results show that supervision positively

impacts loan repayment and that microfinance institutions should provide supervision before

and after loan disbursement.

25
 5.2. Conclusion

Loan default is a big problem facing microfinance institutions and microfinance loan

consumers. Loan repayment is affected by the level of income, loan repayment frequency,

and supervision. However, there was no association between participants' age, gender, marital

status, utilization of loan funds, and loan repayment frequency. Therefore, assessing clients'

loan repayment capacity based on their income, providing supervision before and after loan

repayment, and formulating flexible loan repayment plans are vital in ensuring the

sustainability of the microfinance institutions in Kenya.

26
 5.3. Recommendations

the findings of this study show that loan repayment is affected by the level of income,

loan repayment frequency, and supervision. Microfinance institutions should take causation

when providing loans for borrowers earning less than KSH. 5,000 per month as they have a

high default rate, possibly because they lack sufficient fall-back. Also, microfinance

institutions should provide flexible payments plans, especially lasting 1-3 years, to minimize

loan repayment challenges among consumers. Finally, microfinanceinstitutions should

provide supervision for borrowers and establish loan enforcement strategies.

27
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Addae-Korankye, A., 2014. Causes and control of loan default/delinquency in microfinance

institutions in Ghana. Am. Int. J. Contemp. Res. 4, 36–45.

Gebremedhin, K., 2010. Determinants of successful loan repayment performance of private

borrowers in development bank of Ethiopia, north region.

Haile, F., 2015. Determinants of loan repayment performance: A case study of Harari

microfinance institutions. J. Agric. Ext. Rural Dev. 7, 56–64.

Khaleque, M.A., 2011. Diversion of Loan Use-Who Diverts and Why? Available SSRN

1804756.

Kosen, E.L., n.d. The effect of demographic characteristics on loan performance of

commercial banks in Kenya.

Mokhtar, S.H., Nartea, G., Gan, C., 2012. Determinants of microcredit loans repayment

problem among microfinance borrowers in Malaysia. Int. J. Bus. Soc. Res. IJBSR 2,

33–45.

Munene, H., Guyo, N., Huka, S., 2013. Factors influencing loan repayment default in

microfinance institutions: the experience of Imenti North District. Kenya Int. J. Appl.

Sci. Technol. 3, 80–85.

Nawai, N., Shariff, M.N.M., 2010. Determinants of repayment performance in microcredit

programs: A review of the literature. Int. J. Bus. Soc. Sci. 1, 152–161.

Negese, T., Pasha, S.A., 2014. Performance of Loan Repayment in Ethiopian Microfinance-

An Analysis. Eurasian J. Bus. Econ. 7, 29–29.

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