Abstract:
The main purpose of this study was to evaluate risk management strategies employed by Micro
finance institutions and their impact on the institutions’ financial sustainability. The study sought
to: establish the Micro-Finance Institutions (MFIs) preference for the various sources of finances;
determine the frequency of Microfinance Institutions’ exposure to risk; identify the risk
management strategies used by Microfinance Institutions in the management of risk exposures
and the extent to which they have contributed to their financial sustainability. A survey design
was adopted for the study. The study covered only MFIs within Kisii Municipality selected using
purposive sampling. A sample of 29 respondents consisting of both the managers and the credit
officers participated. The instrument of collecting data was mainly a questionnaire which had both
structured and unstructured questions. Analysis of data was done using descriptive statistics
such as percentages and the likert scale. Some of the findings were donor funding, revolving fund
and government subsidies are the most preferred sources of funding by the sampled MFIs.
Strategic risk, credit risk and liquidity risk are the most frequent risks; whereas reputation and
subsidy dependence occur at a very low incidence. To tone down these risks, the MFIs employ
various management strategies, which include risk avoidance, transferring of risk and mitigating
risks. Mitigation of risks is regarded as the most effective risk management strategy. Specifically,
reconciliation of loan accounts and loan data were considered as the most effective risk
management in determining financial sustainability of the MFIs. Major recommendations are that
institutions’ management should test the impact of the risk management strategies through
internal audit, monitoring and analyzing trends and ratios to check the key indicators in the
results. Also, the institutions should practise sound financial discipline to enable them stand on
their own should the donors withdraw their support.
