Market Risk and Financial Performance of Deposit Taking Micro Finance Banks Kenya

Abstract

Microfinance banks provide small-scale financial services, including loans, savings, and money transfers, to marginalized communities. However, they face significant credit risk due to unsecured lending and the limited credit history of borrowers. This risk is heightened by rapid technological changes and evolving market conditions, which threaten their financial stability. To maintain profitability, microfinance banks must adopt effective credit risk management strategies to assess and mitigate exposures that could impact their financial performance. Therefore, this study sought to examine how market risk affects the financial performance of deposits-taking microfinance banks in Kenya. The study adopted a positivism research philosophy and a panel data research design. The study's target population was 80 MFIs, of which only 8 deposit taking microfinance banks, were studied, licensed and members of Association of Microfinance Institutions (AMFI) from 2012 to 2021. The study used both descriptive and inferential statistics in the analysis of data with the help of statistical software STATA. The findings indicate that market risk has a positive and significant effect on the financial performance of deposit-taking microfinance banks in Kenya. In addition, bank size has a significant moderating effect on the relationship between market risk and financial performance of Kenya's deposit-taking microfinance banks. The study recommends that Kenya's deposit-taking microfinance banks should implement tailored risk management approaches and continuous monitoring to effectively manage market risk and maintain financial stability. In addition, bank size should be considered when formulating risk management strategies, as it significantly moderates the relationship between financial risks and financial performance.