An Evaluation of the Impact of Risk Management Strategies on Micro-Finance Institutions’ Financial Sustainability: A Case of Selected Micro Finance Institutions in Kisii Municipality, Kenya

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.