Impact of Non-Performing Loans on Financial Performance of Microfinance Banks in Kenya: A Survey of Microfinance Banks in Nakuru Town

All over the world financial institutions face massive risk on non-performing loans. As a result of the foregoing, financial institutions are obliged to review their lending policies. In Kenya, the lure of maximizing profitability has been alleged to increase credit risk and the potential for non-performing loans. The aforementioned loans negate profitability of financial institutions and as such the initial object of maximizing profitability by employing relaxed conditions when awarding credit facilities defeats the very goals of financial institutions. This study aimed to establish the effect of non-performing loans on financial performance of microfinance banks (MFBs) in Kenya. The study was conducted in microfinance banks in Nakuru town, Kenya. It was guided by one independent variable (credit risk) and financial performance as the dependent variable. A descriptive research design was adopted. The target population constituted the 66 credit and management staff of the aforementioned microfinance banks. A census survey was employed which implies that there was no sampling. A structured questionnaire was used to collect data from the respondents. A pilot study was conducted prior to undertaking the main study. The aim of pilot testing the instrument was to verify the instruments reliability and validity. The study sought to determine both the content validity of the instrument. The reliability was tested using the Cronbach alpha. The collected data was analyzed both descriptively and inferentially. Descriptive analysis sought to present the opinions of the respondents regarding all the study constructs. On the other hand, inferential analysis enabled making deductions pertinent to non-performing loans and financial performance of microfinance banks under study. The research findings were presented in form of descriptive and inferential statistical tables. It was established that, credit risk significantly affected financial performance of MFBs in Nakuru town. The credit risk negated the MFBs financial performance. It was deduced that, increase in credit risk would significantly reduce the MFBs financial performance. It is anticipated that the study findings and the recommendations hereof, will enable financial institutions particularly microfinance banks to formulate and implement more appropriate strategies to mitigate non-performing loans in order to enhance their financial performance. It is recommended that, potential borrowers should be critically analyzed to assess their credit worthiness before they are awarded loans. It is recommended that, researchers can embark on studies to investigate the financial implication of non-performing loans in other financial institutions in Kenya such as saving and credit cooperative societies.