dc.description.abstract | Credit risk is an important factor that institutions offering services
on credit should
consider seriously and also invest on. A measure of future uncertainties in achieving,
program performance goals within defined cost and schedule constraints. It has three
components: a future root cause, a likelihood assessed at the prese
nt time of that future
root cause occurring, and the consequence of that future occurrence. In general when
borrowers’ assets values are less than loan values, they do not repay. They exercised their
option to default. To the lender, failure to manage risk
, especially credit risk, can lead to
insolvency.
The
objective
of the study
was
to establish the effect of credit risk
management on the financial performance of Deposit taking Micro financial institutions
in Kenya.
The study employed descriptive research
design.
The target population
was the
Nine Deposit taking Micro finance institutions members in Kenya
(the official
association of Deposit taking Micro finance institutions in Kenya, 2013)
registered at end
June 2013 at the Central Deposit taking Micro fi
nancial institutions of Kenya (CBK)
which supervise the activities of Microfinance sector in
Kenya.
Secondary
data
was
collected for this study, for the purpose of analyzing the effect of credit risk management
on financial performance of the nine deposit
taking Microfinance institutions.
The dataset
will be drawn from the Financial Statements of each of the deposit taking MFI under
study throughout the period of study 2009 to 2013 and sourced from the Management of
the institutions. Quantitative data colle
cted
was
analyzed by the use of descriptive
statistics using SPSS and presented through percentages, means, standard deviations and
frequencies.
From the findings, risk management by credit scoring positively impacts on
the return on assets of micro
-
financ
ial institutions. The adoption of credit scoring allows
micro
-
financial institutions to make systematic different offers to loan applicant
s with
different risk profiles. Effective
credit risk leads to more balanced trade
-
off between risk
and reward, to rea
lize a better position in the contends that the deposit taking Micro
financial institutions industry recognizes that an institution needs not do business in a
manner that unnecessarily imposes risk upon it; nor should it absorb risk that can be
efficiently
transferred to other participants. Rather, it should only manage risks at the
firm level that are more efficiently managed there than by the market itself or by their
owners in their own portfolios. Risk diversification positively influences the financial
performance (ROA) of the micro
-
financial
institutions.
The study recommends that
d
eposit
taking Micro financial institutions should devise modern risk measurement
techniques such as value at risk, simulation techniques and risk
-
adjusted return on capital.
Other than relying on credit reference bureau (CRB), the study recommends use of
derivatives to mitigate financial risk as well as develop training on the guidelines to be
used by the financial advisors | en_US |