Since the 1990s, poverty reduction has taken priority at both national and international development levels. Within this framework, various initiatives have been taken. Microfinance has caught the attention of many Aid donors, Non-Governmental Organizations and Governments as an effective tool for poverty reduction. The successful use of microfinance is considered as victory for the poor to escape the poverty traps. In the Kenyan context, this same initiative and hope has been adopted. The popular assumption is that it enables poor households to access credit. Households begin small businesses which would enable them improve their incomes and eventually overcome poverty. The study sought to find out the effects of risk management strategies on profitability of Microfinance Institutions. The Specific objectives of the study were to determine how regulatory risk affects profitability of Microfinance Institutions; examine the effects of operational risk on profitability of Microfinance Institutions; evaluate how interest rate risk affect profitability of Microfinance Institutions and assess the effects of credit risk on profitability of Microfinance Institutions. The research methodology employed a survey design where collection of primary data was done using questionnaires containing closed ended questions for ease of analysis. Data was analyzed using descriptive and inferential statistics with the aid of SPSS software (SPSS version 21.0). The study focused on Faulu Kenya within Nakuru County. A census of 42 respondents consisting of 7 managers and 35 credit officers was done.
The study findings indicated that regulatory risk, operational risk, interest rate risk and credit risk
(β1 = 0.007, p-value= 0.011), (β2 = 0.228, p-value = 0.000), (β3 = 0.031, p-value = 0.009) and (β4=
0.048, p value=0.001) was found to have a significant effect on profitability of Microfinance Institutions. The results indicated that when all the variables are combined contribute to 56.4% of the Microfinance profit. From the findings it can be concluded that operational risk had the greatest effect on profitability of Microfinance Institutions followed by credit risk, interest rate risk and regulatory risk in that order. The researcher recommends further investigations be conducted to determine whether other risks apart from the one researched affect profitability of Microfinance Institutions and that Microfinance Institutions should continue using risk management strategies as a tool for increasing profitability hence enhances their expansion. The study is significant to Microfinance Institutions, small businesspersons and small entrepreneurs and the government in its efforts to alleviate poverty and the achievement of vision 2030.