Effects of Mortgage Financing on Profitability of Microfinance Institutions in Kenya

Abstract

Housing demand has increased in Kenya which has resulted to a high demand for mortgage financing in recent years. However, as financial institutions seize this opportunity, the potential effect on profitability should be well monitored, given that profitability is critical to the sustainability of financial institutions. However, existing studies have not adequately explored the effect of mortgage loans in particular on profitability. The fundamental question that remains unanswered in the existing studies is what is the effect of mortgage financing on profitability of MFIs in Kenya? The objective of the study was to assess the effects between mortgage financing on profitability of microfinance institutions in Kenya from 2013-2017. The research design applied was the descriptive survey design. Targeted population included all the 13 microfinance institutions that offer mortgage financing in Kenya. Since the study population was relatively small, all the 13 MFIs constituted the study sample. The study used secondary data. In particular, the data collected included data on profitability and mortgage financing. The data was collected for a period of 5 years beginning from 2013 to 2017. First descriptive statistics of frequency, percentage and mean were used to analyze the data. To determine whether any significant relationship exists between mortgage financing and profitability of MFIs, inferential statistics were used, regression analysis, correlation analysis and Analysis of Variance. The findings indicated that there was a sharp increase in the offering of mortgage finance by MFIs from 2013 all through to 2017. During the five years’ period, liquidity of the MFIs had a weak significant negative relationship with financial performance of MFIs. The operational efficiency of the MFIs had a strong significant relationship with MFIs.The value of R square from the regression analysis was 0.929 indicating that mortgage financing, liquidity, and operational efficiency collectively explain approximately 92.9% of the change in profitability of MFIs. The study concludes that even as the MFIs continue to venture into mortgage financing, their liquidity has not been adversely affected over the period. Moreover, the study deduces that profitability of MFIs is negatively correlated with mortgage financing and liquidity. The study recommends among recommendations that, more MFIs should venture into mortgage financing since by so doing, they stand a chance to enhance their profitability. However, they have to do so cautiously ensuring that their liquidity is maintained at high. The management of MFIs should also consider business realignment by reviewing their business lines and products and exit those that are not profitable or cost effective. This can help to minimize their operational costs.