FINANCIAL RISK MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA
FINANCIAL RISK MANAGEMENT PRACTICES AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA
Geoffrey Kinyua Bundi - Master of Science in Finance, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Richard Ngali, PhD, CFE - Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Kimani E. Maina, PhD - Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
The general objective of the study was to determine the effect of financial risk management practices on financial performance for the Microfinance banks (MFBs) in Kenya. Specifically, the study sought to establish the effect of credit risk management practices, liquidity risk management practices, operational risk management practices and market risk management practices on financial performance of Microfinance banks in Kenya. The study was based on four theories namely credit risk theory, liquidity preference theory, extreme value theory and the capital market theory. Descriptive survey design was adopted for the study. The target population comprised of all the 13 licensed MFBs in Kenya as at December 2020. Census survey was used, and respondents comprised of 5 managers from each of the 13 MFBs forming a total sample of 65 respondents as the accessible population. The study used both primary and secondary data where Primary data was collected using structured questionnaires and panel data was obtained from CBK annual supervision reports for a six-year period from 2015 to 2020. Multiple linear regression model was used to determine relationship between variables. Data collected was analyzed using both descriptive and inferential statistics with the aid of SPSS version 25 and presented using inferential statistics tables. The study found that Microfinance banks use well-defined credit scoring mechanism; adverse selection and lack of adequate customers’ data leads to high loan default; a stringent debt collection mechanism ensures low non-performing loans and PAR within the industrial average rate; high nonperforming loans affects the profitability of Microfinance banks and elaborate credit policies guide the Microfinance banks in the appraisal and approval of all credit facilities thereby increasing the loan book quality. The mandatory liquidity ratio of 20% as well as the Cash Reserve Ratio (CRR) requirements as prescribed by Central Bank of Kenya helps in mitigating the Microfinance Banks’ liquidity risk exposure. Well defined internal business processes enhance efficiency thereby improving financial performance of Microfinance banks, lack of laid down processes can lead to fraud, lack of adequate, skilled, experienced, and well-trained human resources leads to operational errors thereby financial loss. The results from the regression analysis revealed that there were beta coefficients of 0.619, 0.755, 0.528 and 0.471 for credit risk management, liquidity risk management, operational risk management and Market risk management respectively. The study concludes that credit risk management practices, liquidity risk management practices, operational risk management practices and market risk management practices have a significant effect on the financial performance of Microfinance banks in Kenya. The study recommends the Microfinance banks to adopt a credit risk management framework to counter the credit risk that affect their financial performance. The Microfinance banks should pay attention to their liquidity as one of the determinants of profitability. CBK should maintain the minimum liquidity requirements for Microfinance banks which is currently at 20% as this have an impact on the profitability of Microfinance banks. It is fundamental for Microfinance banks to practice operational risk management techniques to improve their efficacy in operations to safeguard their assets and minimize errors and frauds that might have negative effect on profitability. The management of the Microfinance banks in Kenya should manage the interest rates charged on credit and savings products in line with various customer needs to boost their image, competitiveness, and consequently financial performance.
