Evaluation of the Effect of Risk Management Practices on the Performance of Microfinance Institutions

The financial sector in Ghana has experienced intensive reforms resulting in the closure of many financial institutions that did not meet the required principles. In order to guarantee the sustainability of the microfinance sub-sector, management of risk practices must be effectively carried out. This study aimed at evaluating the effect of some major risk management practices (RMP) on the financial performance of some selected microfinance institutions (MFIs) in the Kumasi metropolis of Ghana. The financial performance measures used were Return on Asset (ROA) and Return on Equity (ROE). The RMPs in question included risk identification, risk appraisal, risk control, risk monitoring and often practiced risk management. A five likert scale questionnaire with closedended questions were administered to ten selected MFIs. The results showed mean ROA and ROE of the selected MFIs to be 3% and 35% respectively. The results also showed a moderate to great extent usage of risk identification, risk appraisal, risk control, risk monitoring and often practiced risk management occasionally. Benchmark ranking of frequent usage of these RMPs was in the order risk identification>risk monitoring> risk appraisal>risk control. It was recommended that Managers and Directors should ensure continuous usage of these risk management practices for more profitability.