Effect of Credit Risk Management Practices on Financial Performance of Micro-finance Organizations in Kenya

Abstract

The escalating rate of credit risks owing to the soaring rate of none performing loans incurred by the MFIs. This nature of a drift weakens the financial steadiness, financial feasibility, and sustainability of the MFIs. However, there is still lacuna of evidence on whether credit risk management practices such as, credit risks analysis, credit risks identification and credit risks monitoring influence financial performance of MFIs firms. The purpose of the present study sought to assess the influence of Credit Risks Management approaches on fiscal performance of Micro-Finance Organizations in Kenya. This study was guide by modern portfolio theory, liquid risk theory and value at risk theory and used descriptive study design. The study population consisted of 54 registered MFIs in Kenya from which all the 54 risk managers and 54 finance officers were involved in the study through census sampling approach. This study used secondary and primary type of data. For secondary data, yearly report of financial records was obtained from the MFIs finance department, while primary data was sourced through issuance of questionnaires to the 54 risk managers and 54 finance officers. The data was descriptively in form of mean, frequencies and percentages, as well as regression analysis. It was found that risk identification and credit risk analyses process was a very significant component of credit risk management practices. It was also found that risk monitoring was equally useful in making sure that risk management approaches are within suitable risk monitoring and that this practice helps the MFIs in discovering mistakes at their early stage of occurrence. There was a positive and significant association between credit risk management practices and MFI financial performance. The study recommended that tougher measures should be employed in management of credit risks to increase positive financial performance of the MFIs. The MFI management should equally spearhead the adoption and application of credit risks management practices that are viable and practical, such as suitable credit risk environment; working under appropriate credit granting procedures; upholding a suitable credit administration which constitute identification, analysis and monitoring processes as well as sufficient controls over credit risks.