The Effect of Credit Risk Management on the Financial Performance of Deposit Taking Microfinance Institutions in Kenya
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Date
2023Author
Munyasia, George O
Type
ThesisLanguage
enMetadata
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This study aimed to investigate the influence of credit risk management on the financial
performance of deposit-taking microfinance institutions (DTMIs) in Kenya. Drawing on
theories including credit risk theory, agency theory, and modern portfolio theory, the research
sought to discern the intricate connections between credit risk management practices and
financial performance outcomes within the microfinance landscape. Employing a descriptive
research design, the study cantered on all 14 Central Bank of Kenya (CBK)-registered DTMIs.
Secondary data extracted from CBK and MFIs' websites, along with annual reports, formed the
basis of the analysis. The study spanned a decade, from 2013 to 2022. The findings unveiled a
spectrum of financial performance, credit risk management, capital adequacy, liquidity, and
interest rate spread across DTMIs. While the regression model demonstrated an ability to
explain around 27.3% of financial performance variance, the F-statistic underscored a
significant relationship between the combined effect of credit risk management, capital
structure, liquidity ratio and interest rate spread on financial performance. The study revealed
that credit risk management had a negative significant effect on the financial performance of
Deposit-Taking Microfinance (DTM) institutions, emphasizing the need to enhance this
practice by reducing the non-performing loan ratio, for improved financial outcomes. The
research underscored a substantial positive correlation between interest rate spread and
financial performance, signifying its significant effect on the financial outcomes of these
institutions. Capital adequacy and liquidity ratio both demonstrated no significant influence on
the financial performance of DTM institutions, suggesting limited impact on financial
outcomes. The study suggested that policymakers focus on bolstering credit risk management
policies, ensuring a balanced liquidity approach, and maintaining ethical interest rate spread
management practices. Emphasizing strategies to enhance credit risk management and interest
rate spread while ensuring stability in capital adequacy and liquidity levels is crucial for the
reliability and financial outcomes of microfinance institutions.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1392]
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