This study examined the impact of loan default on the financial performance of microfinance
institutions in Kenya, using Faulu Microfinance Bank as a case study. The research focused on
three key aspects of loan default: non-performing loans (NPLs), loan loss provisions (LLPs), and
delinquency rates. The primary objective was to assess how these factors influence financial
performance indicators such as profitability, operational efficiency, lending capacity, and borrower
confidence. A descriptive survey design was employed, with data collected from 90 borrowers
both individual and business clients through structured questionnaires. The findings revealed that
non-performing loans significantly undermine the bank’s financial performance by limiting access
to credit, increasing interest rates, and eroding borrower trust. The majority of respondents
reported experiencing changes in loan terms due to NPLs and expressed reduced confidence in the
bank’s ability to manage defaults. Loan loss provisions were found to be vital for institutional
stability and risk mitigation, though many borrowers lacked awareness of their impact on loan
terms. High delinquency rates were shown to increase operational costs and weaken service
delivery and financial health. Based on these findings, the study recommends that microfinance
institutions, including Faulu, enhance credit risk management strategies, invest in borrower
education and financial literacy, improve transparency regarding loan loss provisioning, and adopt
technology-driven monitoring systems. Proactive borrower engagement is also recommended to
maintain trust and reduce default risks. The study offers valuable insights for policymakers,
lenders, and researchers seeking to strengthen the sustainability and performance of microfinance
institutions in Kenya.