Financial Risk Management and Financial Performance of Microfinance Institutions in Nairobi County, Kenya

Abstract

Each company has a financial risk, but a MFI that uses the correct strategies of managing financial risks in their business plan and in their management of financial performance have a higher likelihood of attaining their strategic as well as operational goals. The key to performance of MFIs is management of financial risk. The focus of MFIs is to attain appropriate balance in risk and returns and reduce the adverse effect it might have on their performance financially. To attain this, there is need to have techniques of managing financial risks that are more sound and dynamic to improve performance in this sector that is very competitive and dynamic and the outcome will be competitive advantage generating growth and also profit. The main objective of this study was to determine the relationship between financial risk management and financial performance of MFIs in Nairobi County, Kenya. The study was guided by the following specific objectives: to determine the effects of financial risk management, to examine the effects of deposits, to establish the effect of capital ratio and to assess the effect of liquidity ratio on financial performance of microfinance institution in Nairobi County. Descriptive research design was adopted with the targeted population being a total of 55 MFIs that are located in the County of Nairobi and that are members of AMFI. The study used secondary information that was collected for duration of 5 years from 2013 to 2017 from MFIs financial statements. The study performed multiple regression analysis to determine how MFIs performed financially. SPSS Version 23 was used in analyzing the data where inferential and descriptive statistics were performed. logit regression model was applied in testing the association between management of financial risk and performance financially. The study found that changes on performance of MFIs financially could be accounted for by changes in financial risk management, deposits, capital ratio and liquidity ratio. The study also found that financial risk management, deposits, capital ratio and liquidity ratio and performance of MFIs financially were strongly related. The study also revealed that financial risk management, deposits, capital ratio and liquidity ratio positively and significantly affect performance of MFIs financially. It is recommended that management of MFIs need to invest more in automated strategic risk management tools which would enhance analysis and profiling of their strategic risk. There is need for the management of microfinance institution in Kenya to maintain the liquidity level at safe level as it was found that liquidity ratio positively affect performance of microfinance institution financially. In addition microfinance institution should try and find ways in which they can increase their level of equity this will in return lower cost on capital and will have a positive effect on profitability.