Counterparty Credit Risk Management and Profitability of Microfinance Banks in Nairobi City, Kenya

Abstract

Profitability determines the sustainability of microfinance banks, as it enables them to cover operational costs while ensuring the continued delivery of critical financial services. Regular assessment of profitability enable regulators and stakeholders in detecting emerging risks and making informed strategic decisions aimed at strengthening the sector. Nonetheless, recent trends in Kenya highlight persistent challenges concerning their profitability. The present study examined the influence of counterparty credit risk management on the profitability of microfinance banks. The study was guided by the Merton risk model. Descriptive and inferential methods were employed, with data analyzed using the Statistical Package for Social Sciences (SPSS) and findings presented in tables. The results demonstrated that counterparty credit risk management was strongly and positively associated with profitability (r = 0.710; p = 0.000). Regression analysis further indicated that counterparty credit risk management explained 50.4% of the variation in profitability, underscoring its central role in improving financial outcomes. The study concluded that effective counterparty credit risk management is vital for sustaining profitability in microfinance banks, as it mitigates financial shocks, protects income streams, and strengthens institutional resilience. It was recommended that microfinance banks enhance their credit evaluation processes to reduce vulnerabilities. They should also embrace diversification and risk-conscious investment strategies that align returns with exposure levels, thereby fostering stable and sustainable profitability over time.