Credit Risk and Financial Performance of Deposit Taking Microfinance Banks Kenya.

Microfinance banks provide small-scale financial services, including loans, savings, and money transfers, to marginalized and low-income communities. However, they face significant credit risk due to borrowers' limited financial capacity and unstable income sources. This risk is heightened by continuous internal and external changes, such as technological advancements, which can impact financial performance. To maintain stability and profitability, microfinance banks must effectively measure and manage credit risk exposures that threaten their viability. Therefore, this study sought to examine how credit 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 credit 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 financial risks and financial performance of Kenya's deposit-taking microfinance banks. The study recommends that Kenya's deposit-taking microfinance banks should enhance loan administration, implement strict lending criteria, continuously monitor credit risk, and regularly assess the loan-to-deposit ratio to improve asset quality, reduce non-performing loan losses, and ultimately increase profitability. In addition, Kenya's deposit-taking microfinance banks should consider bank size when developing credit risk management strategies, as it significantly influences the relationship between credit risk and financial performance. Tailoring credit risk policies to account for the scale of operations could enhance financial stability and profitability