Effect of Financial Risk Management Practices on Efficiency of Microfinance Institutions in Kenya

Abstract

Purpose- This paper sought to find the effect of financial risk management practices onefficiency of microfinance institutions in Kenya. The chosen financial risk management practicesfor this research were Credit Risk Management systems, Behavioral Detection and PredictiveAnalysis Systems, Structured Finance Systems and Risk Management Systems.Methodology - A survey approach was employed of all the licensed MFIs that are registeredwith the Association of Microfinance Institutions in Kenya (AMFI). Drop and pick later methodwas used for distribution and collection of questionnaires to the relevant employees of the MFIs.The research targeted 47 MFIs. Statistical Package for Social Sciences (SPSS) and a Likert scalewere utilized for analyzing quantitative data. Regression model was employed to show howfinancial risk management practices affect efficiency of MFIs. Findings - Regression analysis presented R-square of 0.977 which implies that 97.7% ofvariations in the dependent variable is caused by variations in the independent variables whichincluded Credit Risk Management systems, Behavioral Detection and Predictive AnalysisSystems, Structured Finance Systems and Risk Management Systems. Risk management systemswas found to be utilized in the MFIs to the most extent,followed by structured financesystems,credit risk management systems and behavioral detection and predictive analysissystems respectively. The results obtained from the study indicated that there existed an absoluteassociation between financial risk management practices and efficiency of MFIs.Implications – Microfinance Institutions (MFIs) need to create a better environment throughimproved control techniques in which every employee has a stake in refining the internal controlsystem for risk management. There is need for MFIs to improve their financial risk managementpractices, and provide regular training to all their employees on the financial risk managementpractices so as to enhance efficiency since the study positions that there is a positive relationshipbetween Financial Risk Management practices and efficiency.Value - The general public benefitted from the research through improved management of perilsand enhanced services by microfinance institutions. The study was also helpful to governmentinstitutions like The Central Bank of Kenya in setting regulations in the financial sector andsafeguarding the resources of the country. Lastly, academicians were furnished with moreknowledge and facilitate more research on management of risk in financial sector. The foregoingstudy added to the existing literature on the relationship between handling of financial risks andefficiency of MFIs in Kenya and provides a foundation for more analysis.