Abstract:
Credit risk identification is an important aspect that has been identified as having a significant impact on the
financial performance of microfinance institutions (MFIs) in developing countries. This study examined credit risk
monitoring, cost efficiency and financial performance of microfinance institutions in Kenya. The study sought to
answer the following research questions: how do credit risk monitoring relate to the financial performance of
microfinance institutions in Kenya? Secondly, the study also examined the moderating effect of cost efficiency on
the relationship between credit risk monitoring and the financial performance of MFIs in Kenya. The study was
anchored on the theory of Asymmetric information. The study adopted a correlation survey design. The target
population comprised 14 registered Microfinance Institutions in Kenya, with an accessible population of 1458
employees. The population of interests comprised the branch managers, heads of departments, tellers, personal
bankers, credit officers, and customer care employees. A stratified random sampling technique was used given the
sample size of 314 respondents. Both the questionnaire and document analysis were used as data collection
instruments. In the end, data was analyzed descriptively using the frequency, percentages, mean, and standard
deviation while the research hypotheses were tested using the hierarchical regression analysis. The study revealed
that given financial performance, there was a positive and significant relationship with credit risk monitoring (β =
2.292, p-value = .000<.05). Moreover, the study found that there was moderating effect of cost efficiency in the
relationship between credit risk monitoring (β = 2.153, p-value = .000<.0) and financial performance of MFIs in
Kenya. The study concluded that credit risk monitoring play an important role in enhancing the financial
performance of microfinance institutions in Kenya. Also, the study concluded that cost efficiency interacts with
credit risk monitoring to enhance financial performance of MFIs in Kenya. The study recommended that MFIs
should continually emphasize effective credit risk monitoring technique to enhance maximum financial
performance.
Key Words: Cr
