FINANCIAL RISKS AND FINANCIAL PERFORMANCE OF MICRO FINANCIAL INSTITUTIONS IN KENYA
Abdirahman Ibrahim Issack - Master’s Student, Kenyatta University, Kenya
Dr. Vincent S. Mutswenje, PhD - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
Micro Finance Institutions (MFIs) were established in Kenya with the intention of supporting low-income individuals in obtaining credit, which they successfully achieve thanks to their accessibility and extensive network when contrasted with commercial banks. The majority of Kenya's Micro Finance firms have suffered losses ever since the country's Central Bank awarded a license to the country's first institution in 2009. Consequently, this study tried to look at the impact of financial risks on financial performance of Micro Financial Institutions in Kenya. The study emphasized the influence of operational risk, credit risk, liquidity risk and market risk on the financial performance. The study was guided by new institutional economics theory, adverse selection theory, shiftability theory and extreme value theory. The study assumed a descriptive research design to give detailed description of the link amongst the variables. The thirteen microfinance institutions in Kenya as of December 31, 2021, as listed on the Central Bank of Kenya portal, made up the population of this research. Since the sample population is limited, a census of 13 microfinance organizations was conducted. The study utilized secondary data obtained utilizing a secondary data collecting sheet from the MFIs fiscal financial statements published of the Central bank of Kenya. Quantitative data was evaluated via descriptive statistics including mean and standard deviation. With the assistance of a panel regression analysis model was utilized to ascertain the influence of financial risk on MFIs' financial performance. Diagnostic tests were performed to improve the precision of the model's output. The F- test explained the significance of the connection between the variables at a 5% level of significance. Tables and figures were utilized to display the analyzed data. The inferential statistics revealed that financial risks from operational risk have a statistically significant impact on the financial performance of microfinance institutions (p=0.001<0.05). Credit risk was observed to have a statistically significant impact on financial performance of microfinance institutions (p=0.000<0.05). The findings show that liquidity risk was statistically significant on financial performance of microfinance institutions (p=0.012<0.05). However, market risk was established to be statistically insignificant with financial performance of microfinance institutions (p=0.778>0.05). The study recommends that microfinance institutions should ensure putting in place the right policies, regulations and systems that will reduces business losses but realize smooth business operations that will enhance improved financial performance. It also recommends that microfinance institutions should first consider understanding their customers’ ability to honour the financial obligations at hand. This will reduce default rates and enhance improved financial performance. Finally, the study advocates MFIs need to work on the modalities that will see working capital management being optimal to be able to take care of short-term financial obligations that may fall due with ease.