The Effect of Risk-based Audit on Financial Performance in Microfinance Institutions in Kenya

Abstract

The financial crisis in Micro credit institutions is to a great degree accreditable to extreme risk-taking by monetary institutes. Provided that commercial authority is fundamentally a tool for addressing agency complications as well monitoring threat in the financial entities, Deposit Taking MFIs emphasized the role of effective risk based auditing practices in managing risks (AMFI, 2015). Hence, this exploration intended to define the power of RBA on fiscal recital of MFI’s in Kenya. The main purpose of this research is in order to help understand more the influence of RBA on the economic enactment among the MFI’s in Kenya. The use of descriptive research design was used in analysing information in a much more defined and clear manner. The population of the exploration in this case are all 13 licensed MFI’s in Kenya. The secondary information for each micro finance to be gathered include return on equity, which was sourced, from the Annual Central Bank Supervisory Report while inflation rate and GDP rate was sourced from CBK Website. The information obtained was quantitative in nature. The investigation utilized secondary data sources of a one-year period of year 2020. Primary data was gathered through a structured questionnaire. Data, which was obtained, was analysed through correlation as well as regression statistics, which is responsible for determining the relationship between the variables. In the regression analysis it was shown that 74% of the variation in return on equity can be explained by a model that is fitted with risk based audit, inflation and annual GDP as predictor variables. This also implied that 26% of the variation in return on equity was explained by either error or other variables that were not investigated by the study. The study suggests that the management of the MFI’s should embrace measures that promote risk based audit in the firms. This can be done through establishment of better internal audit programmes and ensuring that the financial institutions have qualified and trained staff that can implement the measures. The management should also ensure establishment of an effective risk evaluation strategy to ensure that the institutions are able to operate proficiently in the market. The research recommends that the government through the central bank should uphold measures and policies to make certain successful operation of the markets. It is in such an environment that the annual GDP growth van be realized and inflation rate kept in check to ensure optimal operation of financial institutions. .