The relationship between credit risk management practices and profitability of micro finance institutions in Kenya

Abstract

The Kenya Government's move to regulate Microfinance Institutions (MFI's) was primarily to create an enabling environment for MFI's to maximize outreach on a sustainable basis so as to increase financial access by poor households, thus reducing the population without access to financial services in Kenya. All financial institutions should practice prudent lending in performance of their financial intermediation role to ensure that they avoid those serial borrowers who have no intention to repay putting their going concern in doubt. Risk exists as an integral part of financial services and should not be overlooked.

The primary objective of this Study was to determine the credit risk management practices employed by MFI's in Kenya. Secondly, to establish the relationship between Credit Risk Management (CRM) practices and overall profitability of MFI's in Kenya.

The study employed census survey methodology to explore the credit risk management practices employed by MFI's in the country and financial statements to find out the financial performance as measured by profitability. A researcher constructed questionnaire was administered to elicit responses from the micro finance institutions that are members of the Association of Microfinance Institutions (AMFI).

Face-to-face interviews with executives of micro finance institutions were conducted to supplement the questionnaire and also for an indepth understanding and analysis of certain key aspects of the research. Findings of the study suggest that there is a significant relationship between the performance of the firms and the CRM practices employed. All the respondents have an idea about credit risk management practices though they have not adopted because of lack of resources, lack of acceptable industry models and human resistance.