Relationship Between Credit Risk Management Practices and Financial Performance of Micro Finance Institutions in Kenya

Abstract

The study sought to establish the relationship between credit risk management practices and financial performance of MFIs in Kenya. The main objective of the study was to establish the relationship between credit risk management practices and financial performance of MFIs in Kenya. The specific objective was to identify the credit risk management practices adopted by MFls in Kenya. A survey of all licensed MFIs in Kenya was conducted for the purposes of collecting relevant data in order to form a conclusion on the study objectives. Questionnaires were administered among selected employees of the licensed MFIs in Kenya. The study used SPSS as a statistical tool for analyzing quantitative data. Regression analysis was utilized to determine the relationship between credit risk management practices and financial performance of MFIs. Correlation analysis was then used to determine the strength of the relationship between credit risk management practices and financial performance of the MFIs. ANOVA was also done to test the hypothesis that several group means are equal in the population by comparing the sample variance estimated from the group means to that estimated within the groups. The findings of the study indicated that there was a positive relationship between credit risk management practices and financial performance of MFIs. The study also established the CRM practices adopted by MFIs in Kenya which included loan securitization, credit limits and group lending. These finding were informed by results which indicated that MFIs have put in place effective CRM practices. The study recommended that MFIs continue improving on their CRM practices such as group lending, loan size limits, securitization and standardized loan term. The researcher suggests that a study be done on the correlation between micro finance and traditional bank strategies in light of micro finance institutions in Kenya. A research also needs to be done to establish the crucial aspects of ensuring sustainability of micro finance industry in Kenya. For the purposes of tightening loan default controls, the researcher recommends that a study be done to determine whether the age of the borrower has some influence on the likelihood of the client defaulting on repayment of their loans.