Credit Risk Assessment and Loan Repayment among Development Financial Institutions. A Case of Kenya Industrial Estates Limited

Abstract

The informal sector of the Kenyan economy continues to remain the largest employer of a majority of the population. However, it is bedevilled by a variety of challenges, chief of them being inadequate access to credit. To address this, the government has set up development financial institutions such as Kenya Industrial Estates (KIE) and mandated them with the role of availing loans to the sector in order to spur economic growth. The low rate of loan repayment advanced by Development Financial Institutions (DFIs) has necessitated the need to investigate the cause(s) of this adverse trend. This research was undertaken to probe how credit risk assessment affects loan repayment in development financial institutions, with Kenya Industrial Estates Ltd as a case study. The specific objectives were to find out how borrowers’ character and capacity affect loan repayment at KIE. A descriptive design guided the study with primary data being obtained through a questionnaire, whose reliability was tested and found to be acceptable with a Cronbach alpha of 0.795. A census was conducted on all 28 branches in Kenya. Two respondents from each branch were selected purposively to result in a total of 56 respondents. Regression analysis suggested that borrowers’ character and capacity positively and significantly affected loan repayment. The null hypotheses for the two variables were subsequently rejected. Spearman’s correlation coefficient for the two predictor variables further revealed that they influenced loan repayment positively. The study concludes that borrowers’ character and capacity have a profound effect on loan repayment among DFIs. The study recommends that DFIs need screen borrowers’ credit history and debt-to-income ratio thoroughly before advancing loans in order to improve loan repayment.