The Effect of Firm Size on Efficiency of Microfinance Banks in Kenya

Abstract

Banking sector in Kenya is facing rapid competition which is attributable to a number of factors such as adoption of modern technologies and evolving customer needs. This kind of competition has necessitated the need for Microfinance banks to improve efficiency of their services in order to serve more customers and enhance sales growth. The research wants to establish the effects of on efficiency of microfinance banks in Kenya. A descriptive research design was utilized to find out the hypothetical relationships between variables. Population for the study included 13 Microfinance banks that were licensed to work and operate in Kenya. The sample size for the study included 9 Microfinance banks that were operational in the study period that was between 2011-2015. Secondary sources of data were collected from annual reports of Central Bank of Kenya. The results were presented in form of descriptive and inferential statistics. The results of the study indicate that there is a significant link between the size of the bank, liquidity and capital adequacy and efficiency of microfinance bank. Independent variables explained 22.8% of the variability of efficiency of Microfinance banks. Analysis of variance found that F was statistically insignificant since its probability value was more than 5%, p=.063. There lacked a link between bank size and efficiency. Bank size was significant while customer deposits, asset quality and liquidity were seen to be statistically insignificant. The study recommends that Microfinance banks should invest in modern technologies to effectively integrate all the banks functions and activities to boost efficiency of banking operations. This will minimize supervision and communication costs and impact positive on bank performance. The study was limited to time and cost which necessitated a study of Microfinance banks only. The results obtained in this study are distinctive and cannot therefore be utilized for either direct application in another sector or to make generalization of the banking sector in Kenya. Future researchers can consider investigating this study in other sectors such as listed firms and manufacturing firms which are similar in terms of size and areas of intervention. This will allow the researchers to increase the wide scope of their study whereby findings can be compared and a more reliable conclusion can be drawn. Due to macroeconomic factors such as technological changes, regulations and legal framework among others, it is preferable that a parallel study should be conducted after a period of like fifteen years to find out whether this relationship will still hold.