Effect of Risk Management Strategies on Profitability of Microfinance Institutions in Kenya: A Case Study of Faulu Kenya Nakuru County

Abstract

Since the 1990s, poverty reduction remains an agenda at both national and international development levels. Microfinance initiative has caught the attention of many Aid donors, NGOs and Governments as an effective tool for poverty reduction. In the Kenyan context, this same initiative and hope has been adopted. The popular assumption is that it enables poor households to access credit and mount small businesses which would enable them improve their incomes and eventually overcome poverty. This study sought to find out the effects of risk management strategies on profitability of Micro Finance Institutions. The research methodology employed a survey design where collection of primary data was done using questionnaires. A census of 42 respondents consisting of 7 managers and 35 credit officers was used in the study.  Data was analyzed using descriptive and inferential statistics with the aid of SPSS version 21.0. The study findings indicated that regulatory risks, operational risks, interest rate risks and credit risks (β₁ = 0.007, p-value= 0.011), (β₂ = 0.228, p-value = 0.000), (β_{3 =} 0.031,p-value = 0.009 and (β₄₌ 0.048, p value=0.001) had a significant effect on profitability of MFIs. The study recommends that MFIs should continue using Risk Management Strategies as a tool for increasing profitability.