Abstract:
Fraud is a thorn in the flesh of many organizations in both local and global business ecosystems, more
so in the financial sector because of the liquid nature of their services. To curb this menace, Financial
Institutions including Microfinance institutions implemented fraud risk management practices. While
larger financial institutions afford raft measures for curbing fraud, MFIs contend with less
sophisticated practices in spite of them being the most susceptible to financial improprieties. Further,
the determination of the overall effect of these practices on financial performance is critical in
evaluating their success. The objective of this study therefore was to find out how fraud risk
management practices affect the financial performance of Microfinance Institutions in Kenya. The
study was anchored on the fraud management life cycle theory and focused on twelve deposit-taking
Microfinance Institutions that were in operation in the Nairobi region of Kenya between 2016 to 2020.
The study adopted a descriptive research design using cross-sectional data computed from the average
financial results for five years 2016-2020. The study used purposive and stratified Random sampling
methods to select a sample of 281 respondents from finance, ICT, operations, Audit, and Litigation
managers and staff. The study used descriptive and inferential statistics to analyze the data. The results
showed that fraud risk management positively and significantly affected financial performance by
curbing incidents of fraud and concluded that to improve financial performance microfinance
institutions should implement fraud risk management since they had a positive and significant effect
on financial performance. The study recommended that firms should invest substantially in fraud risk
management to reduce incidences of fraud and improve financial performance. Further, the
management of Microfinance Institutions should continually evaluate and update their practices to
keep abreast with the ever-changing fraud antics.
