The Effect of Credit Risk on Corporate Liquidity of Deposit Taking Microfinance Institutions in Kenya

Abstract

Liquidity risk is mostly triggered by consequences of other financial risks such as credit risk, interest rate risk and foreign exchange risk. It should therefore not be considered in isolation because financial risks are not mutually exclusive. For instance, a bad loan portfolio or a change in interest rates may affect an institution’s liquidity position. The objective of this study was therefore to find out the effect of credit risk on corporate liquidity of Deposit Taking Microfinance Institutions in Kenya. The study involved the collection of secondary data from Central Bank of Kenya and The Association of Microfinance Institutions in Kenya of 5 DTMs that were chosen to represent the 9 DTMs in Kenya. Data was analyzed for the period between 2011 and 2013 using SPSS through correlation analysis, regression analysis, descriptive analysis and variance analysis. Findings were represented in tables. The findings indicated that credit risk and debt to equity ratio had a positive correlation with corporate liquidity for DTMs. On the other hand, portfolio to asset ratio, operating expense ratio and PaR had a negative correlation with corporate liquidity. The researcher concluded that deterioration in the quality of the credit portfolio, very high operational expenses and PaR may have a long term effect on the earnings or capital of a firm and thus adversely affecting the liquidity position. These factors should be consistently monitored and managed to ensure adequate liquidity levels that signify the viability and continuity of a financial institution. The risk mitigating processes put in place should reflect the nature, size and complexity of a firm’s operations. Similar studies can be carried out targeting commercial banks in Kenya to get their perspective on the same.