FINANCIAL RISK AND PROFITABILITY OF MICROFINANCE BANKS IN KENYA
Abstract
The objective of this research was to assess the effect of financial risk on profitability of microfinance banks in Kenya. The study was based on five theories namely; portfolio theory, information asymmetry theory, capital buffer theory, shiftability theory, and operational risk theory. A causal research design was adopted. The population of the study was the 14 microfinance banks operating in Kenya as at 31st December 2022. Census was used. The study utilized secondary data gathered using a data collection instrument and document review guide. The data was collected from the Central Bank of Kenya. The secondary data collected was on an annual basis and covered a period of 5 years (January 2018 to December 2022). Data was analyzed using mean, mode and standard deviation for descriptive statistics and panel regression analysis. The research discovered and subsequently determined that financial risks have a favorable and substantial impact on the profitability of microfinance banks. The findings of the study indicate that credit risk, liquidity risk and operational risk have a statistically significant negative effect profitability. However, it was observed that market risk do not have a statistically significant effect on the profitability. The research further confirmed that competition had a moderating role in the association between financial risk and profitability. The study further found that the effect of financial risks on the profitability of microfinance institutions was mediated by income diversification. The study concluded that profitability of microfinance bank is affected by financial and is further mediated and moderated by income diversification and competition respectively. The study recommended that MFBs to focus on developing strategies that optimize working capital management. This would enable them to effectively meet their short-term financial commitments. In regards to market risk, the Central Bank of Kenya (CBK) could develop and implement more stringent capital adequacy requirements for microfinance banks that are exposed to market risk, and conduct regular stress tests to assess their resilience to market shocks. In relation to operational risk, the research suggests that micro-finance institutions should prioritize the implementation of appropriate laws, regulations, and procedures. These measures aim to mitigate company losses and facilitate seamless operations, ultimately leading to enhanced profitability.
Key Words: Financial Risk, Credit Risk, Liquidity, Market, Operational, Income Diversification Competition
CITATION: Nyangaresi, R. B., & Simiyu, E. (2024). Financial risk and profitability of microfinance banks in kenya. The Strategic Journal of Business & Change Management, 11 (2), 661 – 685. http://dx.doi.org/10.61426/sjbcm.v11i2.2938
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DOI: http://dx.doi.org/10.61426/sjbcm.v11i2.2938
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