The Effect of Credit Risk Management on the Financial Performance of Microfinance Institutions in Kenya

Credit risk is on an increasing rate is becoming an area of concern to many people and \ninstitutions in the lending business globally. This kind of exposure leads to instability and \npoor financial performance of financial institutions. Therefore, this research sought to \nevaluate the effect of credit risk management on the financial performance of DTMs and \nnon-deposit taking MFIs in Kenya. The research design exploited descriptive research \ndesign in this research as it draws in a comprehensive analysis of credit risk management \nand its correlation with financial performance in micro finance institutions. Secondary \ndata gathered from microfinance institutions yearly reports (2011- 2015) was utilized. \nThe study population was 13 microfinance institutions licensed by CBK and 22 nondeposit \ntaking MFIs, though data was attained from 27 MFIs. The data collected was \nsubjected to a multiple regression analysis, correlation, and ANOVA. In the analysis, \nROE was used as a profitability indicator whereas PAR 30 was a measure of credit risk. \nThis study depicted that there is a considerable correlation involving financial \nperformance and credit risk management. From the model, the ROE (Financial \nperformance) was 10.676 when other factors (Credit risk, Liquidity risk and Interest rate \nrisk) are held constant. A unit increase in credit risk holding other factors constant results \nin a 2.165 decrease in the return on equity (ROE). Additionally, a unit increase in \nliquidity risk results in a 0.224 increase in the return on equity other factors held constant. \nFinally, from the model, when other factors are held constant, (Credit Risk and Liquidity \nrisk), a unit increase in the central bank of Kenya interest rates results in a decrease in the \nROE of the microfinance institutions by 0.518. The credit risk and interest risk were the \nmost significant variables as their p-values were less than 0.05. The study recommends \nthat the Mfis in Kenya must pay constant attention to credit risk being a major risk to \nNPLs. Secondly; CBK needs to come up with strong regulations on the unregulated nondeposit \nmaking MFIs. Thirdly, the regulators must come up with adequate capital \nadequacy requirements to shield the MFIs from financial risks. Further research needs to \nbe done on the effects of absence of regulations on the MFIs in Kenya.