The effect of credit risk management on financial sustainability of microfinance institutions in Kenya
Date
2014
Authors
Kanake, Joyce K.
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Microfinance has been considered to be a powerful tool to fight poverty through the provision of
basic financial services such as credit, savings, insurance, and transfer of funds. However, the
credit support granted to such micro businesses usually lacks collateral, it is imperative that the
management of such credit services be sound in order to mitigate the credit risks involved.
Credit risk management determines the success and survival of the MFls. The performance of
the MFI is crucial because it boils down to the long term survivaL The purpose of this research
was to find out the effect of credit risk management indicators on financial sustainability of MFls
in Kenya.
Data was analyzed from 37 MFls who were registered with AMFI by 2012 in Kenya. A linear
regression model was used where financial self-sufficiency was the dependent variable while
predictor variables were portfolio at risk, risk cover ratio, loan loss provision, number of
borrowers and total assets both as control variables for breadth of outreach and size of the
organization respectively.
The study found out that portfolio at risk and loan loss provision both had a significant negative
effect on financial sustainability meaning increase in portfolio at risk and loan loss provision will
reduce financial sustainability of the microfinance institution. Risk coverage ratio and number of
borrowers had a positive impact on financial sustainability but not statistically significant.
However total assets had a significant positive impact meaning increase in total asset would
increase financial sustainability. The study therefore established that credit risk management
affect financial sustainability of microfinance institutions in Kenya. Meaning that in order to
increase financial sustainability of MFIs there is need to properly manage credit risk because
according to the study, credit risk management significantly affects financial sustainability of
microfinance institutions.
Description
Submitted in partial fulfillment of the requirements for the Degree of Master of Commerce
Keywords
Credit risk management, credit, Microfinance, Finance, Kenya