Factors Affecting Liquidity Risk Management Practices in Microfinance Institutions in Kenya

Abstract

Liquidity is a bank’s capacity to fund increase in assets and meet both expected and unexpected cash and collateral obligations at reasonable cost and without incurring unacceptable losses. Liquidity risk is the inability of a bank to meet such obligations as they become due, without adversely affecting the bank’s financial condition. Sound liquidity management can reduce the probability of serious problems. The study adopted a survey research design. The target population included all the 128 employees from the 6 selected MFIs in Kenya. A sample of 96 employees were drawn and used in the study. Questionnaires were used to collect data from the field. The raw data collected was analyzed using the Statistical Program for Social Sciences (SPSS) Version 21.0. The hypotheses were tested using multiple regression analysis. The study found out that Micro Finance Institutions internal control systems, policies, Board oversight and risk monitoring significantly affects its liquidity risk management practices. The study recommended that established MFIs document their local strategies applied in liquidity risk management; effective internal control processes be introduced through implementation of computerized financial management systems; institutions should employ effective policies that impacts positively on the overall liquidity risk management functions; the Board should develop  initiatives to facilitate review of liquidity management framework and also provide strategic direction to the liquidity risk management function and the MFIs to maintain adequate information systems for measuring, monitoring, controlling and reporting on liquidity risks.

Keywords: Liquidity Risk, Micro Finance Institutions, Board oversight and Institutional internal control