Influence of Financial Risk Factors on Financial Performance of Microfinance “ Institutions in Kenya

Abstract

MFIs services and activities in the Kenya have helped the country to reduce its rate of poverty but the country still among the poorest in the world. According to AMFI while over the time credit-only institutions have been slowly improving, deposit taking microfinance institutions improved in 2019-2020 but then worsened slightly in 2020 2021. Microfinance institutions in Kenya have also reported liquidity pressure in terms of pricing since they have less flexibility to adjust prices due to their financial structure. The main objective of the study is to establish the Influence of financial Risk Factors on financial performance of Microfinance Institutions in Kenya. The study specifically established the influence of capital risk on financial performance of Microfinance Institutions in Kenya, to determine the influence of liquidity risk on financial performance of Microfinance Institutions in Kenya, to find out the influence of credit risk on financial performance of Microfinance Institutions in Kenya and to examine the moderating effect of microfinance size on the relationship between risk factors and financial performance of Microfinance Institutions in Kenya. The study used descriptive survey research design; use a target population of 12 MFIs listed under CBK. The study used census approach to sample the entire population. The study used secondary data of published CBK reports of a 7-year period of 2015-2021. Descriptive statistics comprised of skewness, kurtosis and jarque berra. Inferential statistics used was Pearson correlation and hierarchical regression. A study on financial risk factors and financial performance may be of value to the government on policy formation. The microfinance act policy formulators can use the study to ascertain contagious issues that needs address especially how to handle liquidity challenges. The study may assist management of microfinance institutions in establishing the problem facing financial risk factors in their sector. Capital risk had a significant positive effect on financial performance of Nairobi Securities Exchange in Kenya 0.000 (p<0.05). Liquidity risk had a significant positive effect on financial performance of Nairobi Securities Exchange in Kenya p = 0.000 (p<0.05). Credit risk had a significant positive effect on financial performance of Nairobi Securities Exchange in Kenya0.000 (p<0.05). Panel data Pearson correlation results show that microfinance size had a positive significant relationship between financial risk factors and financial performance p= 0.0086 (p<0.05). The study rejected HO1- HO4. The findings guided following recommendations: It was found capital risk to be significant on financial performance hence microfinance firms should improve their assets so as to minimize risks associated to firm capital base. It was found that found liquidity risk to be significant on financial performance hence microfinance firms should manage cash inflow and outflows. It was found that found credit risk to be significant on financial performance hence microfinance firms should check on loan performance and minimize cases of loan non performance by managing credit terms. It was found that found microfinance size had a moderating significant influence hence microfinance firms should diverse there asset base to enable performance.