The Effect of Financial Risk Management Practices on Efficiency of Micro Finance Institutions in Kenya

Abstract

Microfinance stands as one of the most promising tools in the fight against poverty globally, particularly to the disadvantaged population. Microfinance Institutions face risks that have to be managed efficiently and effectively so as to be successful. Various studies have been done on how financial risk management affects financial accomplishment of financial institutions in Kenya, but little has been done on the consequence that financial risk management practices have on efficiency of MFIs in Kenya. This research sought to find out how financial risk management practices affect the efficiency of MFIs. The objectives for this study were to identify financial risk management practices of MFIs in Kenya, to establish levels of efficiency in Microfinance institutions in Kenya and to analyze how financial risk management practices affect efficiency of MFIs in Kenya. A survey approach was employed of all the licensed MFIs that are registered with of Association of Microfinance Institutions in Kenya (AMFI), to come up with a conclusion on the objectives of the study. Drop and pick afterwards method was used for distribution and collection of questionnaires to the relevant employees of the MFIs. The research targeted 47 MFIs. Statistical Package for Social Sciences (SPSS) and a Likert scale were utilized for analyzing quantitative data. Regression model was employed to show how financial risk management practices affect efficiency of MFIs. Regression analysis showed that the R-square was 0.977 which is the same as 97.7%, showing that there was 97.7% variation in dependent variable because of alterations in the independent variables which included Credit Risk Management systems, Behavioral Detection and Predictive Analysis Systems, Structured Finance Systems and Risk Management Systems. Risk management systems was found to be utilized to the most extent ,followed by structured finance systems ,credit risk management systems and behavioral detection and predictive analysis systems respectively. The results obtained from the study indicated that there existed an absolute association between financial risk management practices and efficiency of MFIs. The study recommended a research to be done to establish the vital conditions of ensuring sustainability of the microfinance industry in Kenya. The researcher also recommended a study to be done on how management can create a positive environment through better control mechanisms in which every employee has a stake in refining the internal control system for risk management. The study further recommended that MFIs in Kenya should take on a multifarious approach to risk management in order to attain better benefits from their risk management efforts.