Credit Risk Management on Financial Performance of Selected Microfinance Institutions
Keywords:Credit Risk,, Finance Performance,, Microfinance, Return On Capital Employed
The purpose of this study was to look at the impact of credit risk management on the financial performance of a few Kenyan microfinance firms. The study's approach was a descriptive survey research design and a panel data analysis technique. The study comprised credit managers from all 52 Kenyan microfinance institutions registered in the Association of Microfinance Institutions in Kenya (AMFI) database. The study included all of the institutions that were targeted. The questionnaire, which had previously been tested on local microfinance banks in Kakamega County, was used to collect data. Data analysis included regression analysis and correlation. Throughout the data collection process, the researcher observed integrity. Tables were used to present the study's findings. According to the model summary, credit risk management accounts for 49.1% of the variance in the financial performance of Kenyan MFIs, while other factors not included in the study model account for the remaining 50.9%. With a p-value of 0.01 that is statistically significant. Multiple linear regression analysis revealed that a one-unit change in credit risk management resulted in a significant improvement of 0.672 units in microfinance institution performance (= 0.672 (0.087); at p.01). The study found that prudent and effective credit risk management boosts net profit margins, return on capital invested, and cash flow. The study adds to existing theories by emphasizing the importance of credit risk management in microfinance, lays the groundwork for future research, and advises Kenyan microfinance organizations to invest in efficient credit risk management to improve their financial performance. The report also suggests that studies on Savings and Credit Cooperative Societies (SACCOs) be conducted to compare study findings and that the Association of Microfinance Institutions do studies on non-registered microfinance across the country.
Abdullahi, S. R., Kuwata, G., Abubakar, M. A., & Muhammad, T. A. (2015). The role of budget and budgetary control on organizational performance: A case study of Tahir Guest House, Kano State, Nigeria. International Journal of Innovative Research in Information Security (IJIRIS), 4(2), 22-28.
Achou T F, Tenguh N C (2008): Bank Performance and credit Risk Management. (Master's Thesis, University of Skovde).
Addae, J. (2014). The impact of microfinance on the performance of small and medium-sized enterprises in Ghana. Journal of Small Business and Enterprise Development, 21(1), 105- 126.
Ahmed, W., & Malik, M. N. (2015). The role of microfinance in promoting financial inclusion in Pakistan. Journal of Asian Economics, 38, 105-122.
Altman, E.I. and Saunders, A. (1998) Credit Risk Measurement: Developments over the Last 20 Years. Journal of Banking & Finance, 21, 1721-1742. https://doi.org/10.1016/S0378-4266(97)00036-8 DOI: https://doi.org/10.1016/S0378-4266(97)00036-8
Ernest, S., & Frederic, B. (2017). The impact of climate change on the wine industry. Journal of Wine Economics, 12(3), 216-231.
Gurley, J. G., & Shaw, E. S. (1960). Money in a theory of finance. Washington, DC: Brookings Institution.
Hosna, M. A., Sarker, S. A., & Hasan, M. A. (2009). The impact of microfinance on Poverty reduction in Bangladesh. Journal of Asian Economics, 20(1), 78-94.
Kargi, A. (2011). The impact of microfinance on poverty reduction in Turkey. Journal of Economics, 7 (13), 101-115.
Kolapo, T. A., Adedoyin, I. O., & Olowe, R. A. (2012). The impact of microfinance on the Performance of small and medium-sized enterprises in Nigeria. Journal of Small Business and Enterprise Development, 19(4), 538-558. https://doi.org/10.1108/14626001211277497 DOI: https://doi.org/10.1108/14626001211277497
Kothari, C. R. (2004). Research methodology: Methods and techniques (2nd Ed.). New Delhi, India: New Age International.
Mashoko, N. (2020). The impact of globalization on the Zimbabwean economy. Journal of theAfrican Development Review, 32(2), 123-145.
Mia, M. A. (2017). Determinants of total factor productivity in microfinance institutions: Evidence from Bangladesh. In Microfinance for Entrepreneurial Development (pp. 197-222). Palgrave Macmillan, Cham.
Murthy, U., & Mariadas, P.A. (2017). An exploratory study on the factors contributing loan repayment default among the micro finance institutions in Shah Alam, Selangor, Malaysia. International Journal of Business and Management, 12(12), 242- 250. https://doi.org/10.5539/ijbm.v12n12p242 DOI: https://doi.org/10.5539/ijbm.v12n12p242
Musyoki, J. K., & Kadubo, J. M. (2015). The impact of microfinance on poverty reduction in Kenya: A review of the literature. Journal of African Economics, 24(1), 1-21.
Muturi, E (2016). Effect of credit management practices on loan performance in deposit taking microfinance banks in Kenya. International Journal of Innovations, Business and Management, 10(1), 36-38.
Naeem, M., Baloch, O. B., & Khan, A. W. (2017). Factors affecting banks' profitability in Pakistan. International Journal of Business Studies Review, 2(2), 33-49.
Serwadda, I. (2018). Impact of credit risk management systems on the financial performance of commercial banks in Uganda. Acta Universitatis Agriculturae et Silviculturae Mendelianae Brunensis, 66(6), 1627-1635.
Sobehart, J. R., Smith, J. L., & Westerman, G. (2014). The impact of information technology on firm performance: A meta-analysis. Journal of Management Information Systems, 31(1), 119-153.
Wanja, D., & Jagongo, A. (2017). Credit policy and financial performance of commercial banks in Kenya: International Journal of Current Research, 9(1), 45912-45918.
How to Cite
Copyright (c) 2023 Aggrey Kadima, Mary Nelima Sindani, Muli Maingi
This work is licensed under a Creative Commons Attribution-NonCommercial 4.0 International License.