EFFECT OF LOAN REPAYMENT TERMS ON REPAYMENT OF GROUP LOANS AMONGST MICROFINANCE INSTITUTIONS IN NAKURU TOWN

Abstract

In Kenya, Micro Finance Institutions (MFIs) use the group lending models in lending to existing groups.
According to the Micro Finance Act of 2006, a group loan means a loan given to an individual within a group
and which is jointly guaranteed by all the members of that particular group. In the examination of the concept
of loan repayment performance, Micro Finance Act of 2006 perceives loan performance in terms of defaults of
individual group members in repayment of their loans and the ability of the group members to pay on their
behalf. The act indicates that lenders need to classify as bad debts any loan defaults by group members which
are not covered by the rest of the members. The group members therefore have a burden to pressurize their
peers to make payments on their loans to avoid the whole group being denied future credit facilities. However
different aspects of loan repayment terms including frequencies of payment, interest rates, loan sizes, fines and
penalties, and loan repayment period the groups face challenges affect the loan performance or the groups. This
study examined the effect of loan repayment terms on repayment of group loans amongst microfinance
institutions in Nakuru town. A descriptive study design was utilized. The target population comprised of 2,280
members of groups that had borrowed from MFIs within Nakuru town. The study sampled 96 respondents.
Structured questionnaires were used for data collection which was analysed using SPSS software. The p value
for one way ANOVA for loan repayment terms and loan repayment performance was p=0.399> 0.05 thus
leading to the acceptance of the null hypothesis that the loan repayment terms have no statistical significant
influence on repayment performance of group loans amongst microfinance institutions in Nakuru. The study
thus concluded that loan repayment terms didn’t have statistically significant influence on the loan repayment
performance of group loans amongst microfinance institutions in Nakuru. The study recommended that groups
make payments on a weekly or bi weekly basis as most members have little capacity to save the funds for longer
period of times.