Moderating influence of firm size on the interrelationship between fraud risk management practices and financial performance of microfinance institutions in Kenya

Abstract

Efforts to curb fraud are viewed as critical investments for financial institutions due to the significant threat posed by this vice and the liquid nature of their products. To address this menace, financial institutions, including microfinance institutions (MFIs), have implemented fraud risk management practices. While larger financial institutions can afford comprehensive measures to curb fraud, MFIs often rely on less sophisticated practices despite being the most susceptible to financial improprieties. Furthermore, evaluating the overall effect of these practices on financial performance is critical to assessing their effectiveness. The objectives of this study were twofold: first, to determine the effect of fraud risk management practices on the financial performance of microfinance institutions in Kenya; second, to examine the moderating effect of firm size on the relationship between fraud risk management practices and the financial performance of MFIs in Kenya. The study was anchored in the fraud management lifecycle theory and the market power and efficiency structure theories. It focused on twelve deposit-taking microfinance institutions operating in the Nairobi region of Kenya between 2016 and 2020. The study adopted a descriptive research design, using cross-sectional data computed from the average financial results for the five-year period from 2016 to 2020. Purposive and stratified random sampling methods were used to select a sample of 281 respondents, including finance, ICT, operations, audit, and litigation managers and staff. Descriptive and inferential statistics were employed to analyze the data. The results revealed that fraud risk management practices had a positive and significant effect on financial performance by reducing incidents of fraud. Regarding firm size, the study concluded that firm size had a significant moderating effect on the relationship between fraud risk management practices and the financial performance of large MFIs. In contrast, the moderating effect on the relationship between fraud risk management practices and the financial performance of small MFIs was insignificant. The study concluded that, to enhance financial performance, MFIs should implement fraud risk management practices, given their positive and significant impact. The study recommends that MFIs invest substantially in fraud risk management to reduce fraud incidents and improve financial performance. Additionally, the management of microfinance institutions should continually evaluate and update their practices to stay abreast of evolving fraud tactics. Regarding firm size, the study recommends that MFI management strategically invest to increase earnings and market share to capitalize on the benefits of fraud risk management practices associated with economies of scale