Effects of credit risk management practices on financial Performance of deposit taking microfinance institutions in Kenya

Abstract

Deposit Taking Microfinance institutions are not in the business of managing risk and not avoiding it. The future of the banks will undoubtedly rest on risk management dynamics. Credit is the oldest and biggest risk that a bank, by virtue of its very nature of business inherits. To most of the transition economies lending activities have been controversial and a difficult matter. This is because business firms on one hand are complaining about lack of credits and the excessively high standards set by financial institutions, while financial institutions on the other hand have suffered large losses on bad loans. The purpose of this study was to investigate the impact of credit risk management practices on the financial performance of Deposit Taking Microfinance institutions in Kenya. The study used a descriptive survey approach in collecting data from the respondents. The number of the respondents was 36 staff working in all licensed Deposit taking microfinance institutions in Kenya. From the findings the study concludes that Deposit taking microfinance institutions in Kenya adopted credit risk management practices to counter credit risks they are exposed to and it also concluded that Deposit taking microfinance institutions adopt various approaches in screening and analyzing risk before awarding credit to clients to minimize on loan loss. This included establishing capacity/competition and conditions and use of collateral/security and character of borrower were used in screening and risk analysis in attempt to reduce manages credit risks. The study further concludes that there was a positive relationship between credit risk management practices and the financial performance of Deposit taking microfinance institutions.