Influence of financial risk management training on the adoption of its practices by Small and Medium Enterprises in Nairobi County

By: MWANIKI, Daniel Ndirangu MBA Class of 2022

The Influence of Financial Risk Management Training on the Adoption of Practices by SMEs in Nairobi County

Small and Medium Enterprises (SMEs) are critical drivers of economic growth, particularly in emerging markets like Kenya. Despite their importance, many SMEs face substantial financial risks that threaten their survival and growth. These risks include liquidity constraints, market volatility, and credit risks, all of which can significantly disrupt business operations. A major factor contributing to SME vulnerability is their limited capacity to manage financial risks effectively. This study explores the influence of financial risk management (FRM) training on the adoption of key risk management practices by SMEs in Nairobi County.

The Role of Financial Risk Management in SMEs

The study identifies financial risk management as a vital practice for SMEs to navigate uncertainties and remain sustainable in the long term. The research focuses on three main pillars of financial risk management: risk identification and analysis, risk monitoring, and risk mitigation. These pillars form the core of entrepreneurial training programs that aim to equip SME owners with the necessary tools and knowledge to manage potential financial threats. The study seeks to understand whether this training leads to practical adoption of risk management practices by SMEs.

Key Findings

1. Financial Risk Identification and Analysis

Risk identification and analysis are foundational elements of financial risk management. They involve recognizing both internal and external financial risks, assessing their frequency, and categorizing them based on their potential impact on the business. The training provided to SMEs in Nairobi County emphasizes the importance of systematically identifying risk factors and assessing their likelihood and severity.

The study finds that SMEs that have undergone FRM training show a marked improvement in their ability to identify and analyze risks. These businesses are better equipped to recognize various risk exposures, particularly those related to market fluctuations, liquidity, and credit. By categorizing risks according to their severity and frequency, SMEs are able to allocate resources more effectively to manage high-priority risks. This capability is critical for the long-term sustainability of SMEs, as it allows them to be proactive rather than reactive in their risk management efforts.

However, the study also highlights a challenge: while SMEs are proficient in identifying and analyzing risks, some struggle with fully integrating these practices into their strategic decision-making. This suggests that ongoing support and refinement in the training content are needed to enhance the adoption of risk identification practices.

2. Financial Risk Monitoring

Risk monitoring is another crucial aspect of financial risk management that allows SMEs to track identified risks over time, ensuring they are adequately managed and controlled. The training teaches SMEs how to create and maintain risk registers, which help monitor changes in the likelihood or severity of risks. This process enables businesses to detect potential issues early, thus allowing for timely intervention.

According to the study, SMEs that participated in the FRM training showed significant improvement in their ability to monitor risks. These enterprises regularly updated their risk registers and were more likely to review their risk management strategies in light of changing business environments. The study found that SMEs that continuously monitored risks were better prepared to mitigate financial threats before they escalated. Furthermore, risk monitoring allowed these businesses to adjust their internal controls more effectively, minimizing exposure to emerging risks.

Nevertheless, the study points out that some SMEs lack the capacity to fully adopt robust monitoring systems. For example, businesses with limited financial resources or lower levels of technological adoption struggle to implement effective risk-tracking mechanisms. This indicates that training programs should also address the resource and technological barriers that prevent some SMEs from fully utilizing risk monitoring tools.

3. Financial Risk Mitigation

Risk mitigation is the final step in the financial risk management process. It involves reducing, avoiding, or transferring risks to external parties. The training provided to SMEs focuses on helping entrepreneurs understand when to accept a certain level of risk, when to take steps to reduce exposure, and when to transfer risk through mechanisms such as insurance.

The study reveals that, while FRM training significantly improves SMEs’ understanding of risk mitigation, there are notable gaps in the practical adoption of these strategies. Specifically, many SMEs are reluctant to engage in risk transfer mechanisms, such as purchasing insurance. This reluctance is often due to financial constraints or a lack of trust in insurance products. As a result, many SMEs remain exposed to financial risks that could otherwise be mitigated through external risk-sharing strategies.

Despite this, SMEs that actively engage in risk mitigation practices are better positioned to withstand financial shocks. Those that apply risk avoidance or limitation strategies, such as diversifying their revenue streams or maintaining liquidity buffers, report better business resilience and growth.

Challenges and Gaps in Adoption

While FRM training has a positive influence on the adoption of risk management practices, the study identifies several challenges that hinder full integration. First, businesses with lower educational backgrounds, particularly those led by entrepreneurs with only primary or secondary education, face difficulties in applying the more complex aspects of financial risk management. These SMEs often require additional support beyond the training sessions to fully grasp and implement the learned concepts.

Additionally, the study finds that post-training follow-up is crucial for ensuring long-term adoption of risk management practices. Entrepreneurs who receive ongoing mentorship or coaching are more likely to successfully integrate risk management strategies into their business operations. The study recommends that training organizations, such as Hand in Hand Eastern Africa (HIH EA), partner with insurance companies and financial institutions to provide more practical, accessible risk transfer solutions and to offer extended support after training.

Conclusion and Recommendations

The study concludes that FRM training significantly enhances the adoption of financial risk management practices among SMEs in Nairobi County. SMEs that participate in such training are better equipped to identify, monitor, and mitigate financial risks, which improves their resilience and ability to grow. However, challenges in the full adoption of these practices—especially risk transfer—remain a significant concern.

To address these gaps, the study recommends:

1.   Enhanced Post-Training Support: Offering extended mentorship and follow-up to ensure that SMEs can fully adopt the trained practices.
2.   Partnerships with Insurance Providers: Collaborating with insurance companies to make risk transfer mechanisms more accessible and attractive to SMEs.
3.   Tailored Training Programs: Designing training programs that account for the educational and resource limitations of SME owners, ensuring that even less-educated entrepreneurs can benefit from FRM practices.

By refining FRM training and addressing the barriers to adoption, policymakers and training institutions can better equip SMEs to navigate financial risks, ensuring their long-term sustainability and contribution to economic growth.