The effect of Credit Risk management on the financial Performance of Deposit taking Micro - Finance institutions In Kenya

Credit risk is an important factor that institutions offering services \non credit should \nconsider seriously and also invest on. A measure of future uncertainties in achieving, \nprogram performance goals within defined cost and schedule constraints. It has three \ncomponents: a future root cause, a likelihood assessed at the prese \nnt time of that future \nroot cause occurring, and the consequence of that future occurrence. In general when \nborrowers’ assets values are less than loan values, they do not repay. They exercised their \noption to default. To the lender, failure to manage risk \n, especially credit risk, can lead to \ninsolvency. \nThe \nobjective \nof the study \nwas \nto establish the effect of credit risk \nmanagement on the financial performance of Deposit taking Micro financial institutions \nin Kenya. \nThe study employed descriptive research \ndesign. \nThe target population \nwas the \nNine Deposit taking Micro finance institutions members in Kenya \n(the official \nassociation of Deposit taking Micro finance institutions in Kenya, 2013) \nregistered at end \nJune 2013 at the Central Deposit taking Micro fi \nnancial institutions of Kenya (CBK) \nwhich supervise the activities of Microfinance sector in \nKenya. \nSecondary \ndata \nwas \ncollected for this study, for the purpose of analyzing the effect of credit risk management \non financial performance of the nine deposit \ntaking Microfinance institutions. \nThe dataset \nwill be drawn from the Financial Statements of each of the deposit taking MFI under \nstudy throughout the period of study 2009 to 2013 and sourced from the Management of \nthe institutions. Quantitative data colle \ncted \nwas \nanalyzed by the use of descriptive \nstatistics using SPSS and presented through percentages, means, standard deviations and \nfrequencies. \nFrom the findings, risk management by credit scoring positively impacts on \nthe return on assets of micro \n- \nfinanc \nial institutions. The adoption of credit scoring allows \nmicro \n- \nfinancial institutions to make systematic different offers to loan applicant \ns with \ndifferent risk profiles. Effective \ncredit risk leads to more balanced trade \n- \noff between risk \nand reward, to rea \nlize a better position in the contends that the deposit taking Micro \nfinancial institutions industry recognizes that an institution needs not do business in a \nmanner that unnecessarily imposes risk upon it; nor should it absorb risk that can be \nefficiently \ntransferred to other participants. Rather, it should only manage risks at the \nfirm level that are more efficiently managed there than by the market itself or by their \nowners in their own portfolios. Risk diversification positively influences the financial \nperformance (ROA) of the micro \n- \nfinancial \ninstitutions. \nThe study recommends that \nd \neposit \ntaking Micro financial institutions should devise modern risk measurement \ntechniques such as value at risk, simulation techniques and risk \n- \nadjusted return on capital. \nOther than relying on credit reference bureau (CRB), the study recommends use of \nderivatives to mitigate financial risk as well as develop training on the guidelines to be \nused by the financial advisors