Influence of Digital Loan Repayments on Loan Performance of Microfinance Banks in Kenya

Abstract

Microfinance banks promote financial inclusion by serving underserved populations but face challenges of poor loan performance, with NPL ratios reaching 32.9% as of June 30, 2023, compared to 14.5% for commercial banks. To address this issue, they are increasingly adopting digital innovations such as digital loan repayments. The objective of the research was to examine the influence of digital loan repayments on the loan performance of microfinance banks in Kenya. The research adopted an ex post facto design and a pragmatist research philosophy. The target population was 348 loan officers from all 13 licensed microfinance banks in Kenya. Proportionate stratified sampling was used to select the sample from the target population. The study utilized both secondary and primary data. A semi-structured questionnaire was used to collect primary data. Thematic analysis was employed for analyzing qualitative data. Inferential and descriptive statistics were used to analyze quantitative data using SPSS version 28. Descriptive statistics included the mean and standard deviation. Inferential statistics involved logistic regression and the Pearson correlation coefficient. The findings indicated that digital loan repayments had a statistically significant impact on loan performance among Kenyan microfinance banks. The study recommends that microfinance banks expand digital repayment options by integrating mobile money, internet banking, and agency networks, along with borrower awareness programs to encourage their use. Regulators should promote efficient and accessible systems with multiple channels to improve repayment rates, lower costs, and reduce defaults.