Managing market risk for financial performance: experience from micro finance institutionin Kenya
| DOI | https://doi.org/10.1108/JFRC-02-2021-0014 |
| Published date | 12 July 2021 |
| Date | 12 July 2021 |
| Pages | 561-579 |
| Subject Matter | Accounting & finance,Financial risk/company failure,Financial compliance/regulation |
| Author | Peter Karugu Kahihu,David Muturi Wachira,Stephen Makau Muathe |
Managing market risk for
financial performance: experience
from micro finance institution
in Kenya
Peter Karugu Kahihu
Department of Business Studies, Faculty of Business and Communication,
St Paul’s University, Limuru, Kenya
David Muturi Wachira
Department of Commerce, School of Business and Economics,
Daystar University Nairobi Campus, Nairobi, Kenya, and
Stephen Makau Muathe
Department of Business Administration –School of Business, Kenyatta University,
Nairobi, Kenya
Abstract
Purpose –The purpose of this study was to investigate on managing market risk and financial
performance,experience from microfinance institutions(MFIs) in Kenya.
Design/methodology/approach –This study used positivism philosophy and used explanatory non-
experimental research designs. The targeted population was all the 13 registered deposit-taking MFIs in
Kenya and a census approachwas used. The study used secondary data which was collectedand analyzed
from microfinance Institutions annual audited financial reports for the period between 2014 to 2018. This
study was anchoredon two theories, namely, resource-basedvalue theory and extreme value theory.
Findings –The results indicated that interest rate and financial leverage risk had a positive significant
effect on the financial performance of MFIs in Kenya. Foreignexchange risk was found to have a negative
significant effect on the financial performance of MFIs. However, inflation rate risk was found to have no
significanteffect on the financial performance of MFIs.
Research limitations/implications –This study recommended that the chief executive officers of
MFIs should use the mechanism of identifying market risk variables, especially Interest rate, financial
leverage and foreignexchange risks to enable them to put the necessary measuresto mitigate those risks and
enhancethe financial performance of MFIs in Kenya.
Originality/value –This study is unique as it touchesthe microfinance industry which has a steady fast
growth in assisting accessibilityof financial services to small and medium enterprises. Most of the previous
study concentratedon other industry in the financial sector.
Keywords Kenya, Foreign exchange risk, Financial performance, Interest rate, Inflation rate,
Market risk, Financial leverage risk, Microfinance institutions, Interest rate risk, Inflation risk
Paper type Research paper
1. Introduction
Microfinance is one of the ways of building the capacities of the poor who are largely
ignored by commercial banks and other lending institutions and graduating them to
sustainable self-employmentactivities by providing them with financial services like credit,
Managing
market risk
561
Received15 February 2021
Revised7 April 2021
Accepted27 May 2021
Journalof Financial Regulation
andCompliance
Vol.29 No. 5, 2021
pp. 561-579
© Emerald Publishing Limited
1358-1988
DOI 10.1108/JFRC-02-2021-0014
The current issue and full text archive of this journal is available on Emerald Insight at:
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savings and insurance. Indian’s microfinance institutions (MFIs) have managed to meet a
wide outreach to rular people than Bangladesh MFIs where MFIs originated (Anand and
Shakeel, 2012b). The main objective of microfinancein the world is to serve the population
which is regarded to be of highest risk and those who are considered “unbankable.”The
uniqueness of microfinance practice lies in its ability to combine both financial and social
intermediation, which is known as the double bottom line, in achieving its goals. Older
Indian’s MFIs have shown better performance in terms of achieving their financial goals
than the younger MFIs (Vivek and Wadugu, 2016). Veton et al. (2021) observed that
organizational financial stability influences the overall organizational performance,
especially when it applies to financial institutions like bank or MFIs in a country. The
essential functions of financial stability among them investment, economic growth and
trade openness affect the overall operations of the bank. Market risk is the potential loss of
value of assets and liabilitiesarising from movement in market prices (Ghosh,2012). Market
risks are of financial nature which occurs owing to fluctuations in the financial market and
are caused by a mismatch between the assets and liabilitiesof a business. The mismatch on
compositions of assetsand liabilities of any organization will determine the kind of exposure
it has to various kinds of market volatilities (Abhay, 2019). Market risks can also be
described as the risk of losses in liquid portfolio arising from the movements in market
prices. Fluctuations of the market cause losses of incomegenerated from the assets held for
investment and lead to the poor financial performanceof the organization (Aykut, 2016).
In times of global financial crisis like in 2007, market risks affected the operation of the whole
market and could not be avoided or mitigated by holding a certain portfolio (Ahmet, 2016).
Market risk is financial in nature and is caused by fluctuations in the financial markets which
results to mismatch between the organization’s assets and liabilities (Abhay, 2019). Market risk is
inherent in every business and thus proper risk management strategies must be put in place to
balance off risk and returns minimizing negative effects on financial performance (Mudanya and
Muturi, 2018). MFIs are crucial organizations in the financial sector worldwide as they have
facilitated the access of financial services to a wider range of customers who could not access
those services through the banks (Anand and Shakeel, 2012a;Musau et al., 2018).
Kenya Vision 2030 blueprint recognises that for the country economy to raise gross domestic
price growth rate to at least 10%, it requires a vibrant and competitive financial services. The
country must embrace and encourage high levels of savings by increased finanical access
through formalisation of the MFIs (Government of Kenya, 2008).To support the 10% growth rate
asenvisagedinvision2030,microfinance industry in Kenya has developed various reforms
intiated by the government over several years in line with their rapid growth to enhance their
supervisions and to ensure they adhere to statutory requirements. Microfinance Act (2006) was
established to give the legal, regulatory and supervisory framework for the microfinanceindustry
in Kenya. In the year 2008, Microfinance Institutions Regulation (2008) law was enacted for
regulation of the deposit-taking MFIs. Proceeds of crime and Anti Money Laundering
(Amendment Act) 2012 law came to effect which applied to all deposit-taking institutions.
Despite the growth of the MFIs in Kenya, they have reported poor financialperformance
(Central Bank of Kenya, 2019). In the year 2014, the MFIs reported a combined profitof
Kshs1bn, then the profits declined to Kshs592min 2015 wich was 169% decline. In the year
2016, they reported losses amounting to Kshs331m, year 2017 they reported combined total
losses of Kshs622m and year 2018 a combined loss of Kshs1.4bn which amounted to a
decline of 131% from 2017 (Central Bank of Kenya, 2017). Choice MFB, Century MFB,
Daraja MFB and Maisha MFB have been faced with severe financialissues which led them
to breach the CBK minimum statutory requirements on the core capital signaling financial
instability in the year 2018. Furthermore, the same year Choice MFB failed to meet the
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