CREDIT RISK MONITORING, COST EFFICIENCY AND FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN KENYA

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