Operational Risk Management and Financial Performance: An Empirical Analysis of Cost Efficiency and Return on Assets
DOI:
https://doi.org/10.47941/ijf.3726Keywords:
Operational Risk Management, Cost-To-Income Ratio, Operating Expense Ratio, Return on Assets, Microfinance InstitutionsAbstract
Purpose: The study sought to analyze the effect of operational risk management on the financial performance of Microfinance Institutions (MFI) in Rwanda. The research analyzed the influence of the operational efficiency variables, which are Cost-to-Income Ratio (CIR) and Operating Expense Ratio (OER) on financial performance measured through Return on Assets (ROA), taking into account the Lending Rate (LR) and Inflation Rate (IR).
Methodology: A quantitative research method was used for the study, with panel data being used for the design. A total of 15 publicly listed microfinance institutions were chosen from a population of 22 firms whose data were readily available. Methods of data analysis included descriptive statistics, correlation analysis, and panel regressions using STATA software. The Hausman specification test was performed to identify which regression to use between fixed and random effects models.
Findings: From the analysis, it can be noted that there were significant negative correlations between financial performance and CIR (r = -0.432) as well as OER (r = -0.398). Also, regression results showed that CIR and OER had significant negative impacts on ROA, suggesting that higher operational costs lower profitability. Moreover, the lending rate was found to have a positive impact on ROA, while inflation had a negative impact, albeit not statistically significant. Also, it was found from the Hausman test results that χ² = 9.41, p = 0.024; therefore, FE model is the preferred estimator. Overall, the paper concludes that operational risk management is an essential determinant of financial performance.
Unique Contribution to Theory, Policy and Practice: This research is an important contribution to the theoretical perspective of the connection between the management of operational risk and financial performance in MFIs. It stresses the significance of operational efficiency and regulation and will be useful for practitioners as they will be able to maximize profits by minimizing costs and improving internal control systems.
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Copyright (c) 2026 NIYIBIZI François Xavier, Prof. GWAHULA Raphael, Dr. ABAYO Abdiel
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