RISK ASSESSMENT STRATEGIES AND THE SUSTAINABILITY OF MICROFINANCE BANKS IN KENYA

Abstract

The sustainability of microfinance banks is paramount for their functionality and long-term survival, with risk assessment strategies playing a crucial role. In Kenya, the sector has recently experienced financial instability, with total assets declining by 4.8 percent to KShs. 70.4 billion in 2022, largely due to a 3.1 percent reduction in gross loans and advances. This instability, coupled with collective pre-tax losses of Kshs. 980 million underscores the urgency of examining risk assessment strategies as determinants of sustainability. This study investigated the influence of risk assessment strategies on the sustainability of 14 Central Bank of Kenya-regulated MFBs between 2016 and 2023. Adopting a positivist research philosophy and longitudinal panel design, secondary data were extracted from audited financial statements and regulatory reports. Risk assessment was operationalized using excess/deficiency capital adequacy ratios and insider loans, while sustainability was measured through financial self-sufficiency. Panel least squares regression was applied in E-Views, with Hausman specification tests ensuring robust model selection. Findings showed that risk assessment strategies had a marginal influence on sustainability, with current-period effects (β=0.09, p=0.09) and lagged effects (β=-0.01, p=0.80) being non-significant. The Hausman test (χ²=9.229, p=0.5106) confirmed random-effects estimation. The study extends Risk Management Theory by demonstrating that static, compliance-oriented capital adequacy and insider loan controls inadequately capture the unique risk dynamics of microfinance, recommending the adoption of dynamic, outcome-based frameworks.