Credit Management Practices, Firm size and Financial Performance of Microfinance Institutions in Kenya

Abstract

Microfinance institutions (MFIs) play a major role in promoting financial inclusion by providing financial services to underserved households and enterprises. However, the sector continues to face financial sustainability challenges, recording a negative profitability of 46.75 percent in 2024 and rising levels of non-performing loans to 32.1 percent, exposing them to liquidity constraints and heightened financial shocks. The increasing deterioration in loan portfolio quality exposes MFIs to credit and liquidity risks, which may undermine their ability to meet regulatory requirements and sustain long-term growth. Therefore, the study aimed to assess on the moderating effect of firm size on the relationship between credit practices and the financial performance of microfinance institutions in Kenya. The study was anchored on information asymmetry theory and cross-sectional survey research design. The study targeted 30 respondents comprising of chief operating officers, branch managers and credit officers from the 10 microfinance institutions. Hierarchical regression model incorporating firm size was employed to assess the relationship between credit management practices and financial performance. the analysis established that credit appraisal and credit risk control had statistically significant effect on the financial performance of microfinance institutions with p-values of 0.041 and 0.000. However, credit terms were found to have insignificant effect on microfinance performance. The study further established that after introduction of firm size, the model's explanatory power, coupled with the absence of statistically significant interaction effects reduced, revealing that firm size did not significantly moderate the relationship between credit management practices and the financial performance of microfinance institutions in Kenya. The study recommends managers to strengthen credit appraisal systems by adopting comprehensive borrower assessment procedures related to rigorous evaluation of applicants' creditworthiness, repayment capacity and collateral adequacy before loan approval. Since credit risk control was found to have a significant positive effect on financial performance the study recommends microfinance to invest in continuous loan monitoring, early warning systems, regular portfolio reviews and effective loan recovery strategies to minimize default risk.   Keywords:       Microfinance institutions, credit management practices, financial performance and Firm Size.