The Relationship Between Core Capital, Liquidity, and Profitability of Deposit-taking Micro-finance Institutions in Kenya

Abstract

The purpose of this research was to look at the link between core capital, liquidity, and profitability of the microfinance-banks in Kenya. The population for this study was all the thirteen microfinance-banks operating as at 31st December 2017, while the sample comprised the nine deposit-taking microfinance institutions that were in operation for five years from 2013-2017, which represented 69% of the total population. The study used descriptive research design and multiple regression model that was analyzed using SPSS software version 22. Secondary data sources in form of audited financial statements extracted from CBK website was used. The study results showed that core capital and liquidity were positively but weakly correlated with profitability, while operational efficiency which was used as a control variable was strongly and negatively correlated with profitability. The coefficient of determination R2 was 0.839 hence the three independent variables combined explained 83.9% variation in profitability of MFB’s. The Durbin Watson test for the study variables was 2.072, implying that there was no autocorrelation between the study variables. The level of significance for the regression model was less than 0.01, hence the three independent variables were significant in estimating the profitability of MFB’s. This study concluded that core capital and liquidity are not significant determinants of profitability for deposit-taking microfinance institutions evidenced by p-values of 0.210 and 0.424 correspondingly which were more than 0.01. The recommendations of this study are that microfinance practitioners should give due attention to core capital, liquidity management, and operational cost management to maximize profitability and shareholders wealth. The regulator, CBK should also review core capital minimum threshold upwards so as to ensure MFB’s are adequately capitalized to protect depositor’s funds and ensure their robust growth.