Financial Risk Management Practices on Financial Performance of Microfinance Institutions in Kiambu County, Kenya

Abstract

Purpose: MFIs are subject to financial risks, just like all other financial institutions. This is intimately tied to their primary businesses of managing credit and accepting deposits. Therefore, risk management is crucial for MFIs in order to maximize their return on investment. The current study sought to establish the effect of financial risk management practices on financial performance of microfinance institutions in Kiambu County, Kenya. The study focused on establishing the effect of liquidity risk management practices, operational risk management practices, credit risk management practices, and market risk management practices on financial performance of microfinance institutions in Kiambu County, Kenya. The theories anchoring the study comprised of Risk Management Theory, Extreme Value Theory, Credit Risk Theory, and Capital Market Theory.
 Methodology: A descriptive survey research design was adopted in the study. The target population comprised of 31registered microfinance institutions operating in Kiambu County. The unit of observation comprised of Risk and Compliance Manager, Finance Manager, Operations Manager, Credit Manager, and Business Development Manager from each of the microfinance institution making a total of 155 respondents. A census approach was adopted in the study where all the registered microfinance institutions were involved in the study. Both primary and secondary data was employed in the study where 5-point Likert scale questionnaires were employed to gather primary data while a secondary data collection sheet was utilized to gather secondary data. Both descriptive and inferential statistics were used to analyze the collected data. The statistics were generated by help of Statistical Package for Social Scientist and MS Excel.
 Findings: The results of the analysis revealed that Liquidity Risk Management Practices, Operational Risk Management Practices, Credit Risk Management Practices, and Market Risk Management Practices positively and significantly affects financial performances of microfinance institutions in Kiambu County, Kenya as shown by beta values of 0.401, 0.309, 0.497 and 0.351 and significant values of 0.000. 0.001, 0.000 and 0.006 respectively.
 Unique contribution to theory, practice and policy: The results implies that when each of the independent variable is increased with one unit, financial performance of the microfinance institutions increases with the respective beta value of the independent variable. The results led to conclusions that liquidity risk management practices, operational risk management practices, credit risk management practices, and market risk management practices bears appositive and significant effect on financial performance of microfinance institutions in Kiambu County. The study provided recommendations to the management of the microfinance institutions to enhance their practices in areas of liquidity risk management, operational risk management, credit risk management, and market risk management to improve financial performance to a positive and significant level.

Governance of Microfinance Institutions in Nairobi, Kenya

“…According to the findings, most of the respondents were in agreement, that financial statements were used to track the monetary of goods and services into and out of the organization. This supports Mabonga & Kimani (2017) observation that financial statements are necessary since they are used to maximize capital and reduce potential risk that may exist.…”

“…They are perceived as a mechanism of fixing credit markets and unleashing the productive capabilities of the poor who are reliant on self-employment (Cull & Morduch, 2017). In practice, however, microfinance have not lived up to their expectation, in that they have had a minimal effect on customers primarily due to their dismal performance (Arsyad, 2015;Mabonga & Kimani, 2017). The recent financial scandals and mismanagement practices leading to loss of billions in shillings have brought out governance issues of MFIs in Kenya under close scrutiny.…”

“…Whilst, there have been studies on governance issues relating to microfinance, most of them have not been exhaustive. For instance, Kalu et al (2018) focused only on credit risk management and financial performance of microfinance institutions in Uganda, while Mabonga & Kimani (2017) examined only the impact of financial management on financial performance of microfinance institutions in Kenya. Koech & Kawenga (2015) delved only on the effects of bancassurance on performance of microfinance institutions in Kenya.…”