Effect Of Macroeconomic Variables On Financial Performance Of Microfinance Banks In Kenya

Abstract

Macroeconomic variables cause variation in organisations’financial accomplishments. This study aimed at determining the macroeconomic variables’ effect on financial performance of Kenya’s microfinance banks. The study relied on two theories that explained how equilibrium rates of interest and rate of growth can be determined, which are macroeconomic variables. The study identified six determinants of financial performance, i.e., the rates of interest, inflation and forex. Other determinants were GDP, firm size (index of market size) and the level of unemployment. Various local and international studies were reviewed, which assisted in the construction of a conceptual framework. Four independent variables were considered for this study to determine their effect on ROA. The study used longitudinal and descriptive research design for seven-year panel data. Thirteen microfinance banks in Kenya made up the population. Therefore, it was a census study. Secondary data sourced from annual CBK reports on supervision of financial institutions, from 2012 to 2018 were used. Three tests were duly executed on the data to analyse its normality, autocorrelation and multicollinearity. Normality was diagnosed used Shapiro Wilk test, while autocorrelation was determined using Durbin Watson test. The VIF value determined the level of multicollinearity. Subsequently, the data was subjected to further analysis to obtain descriptive statistics i.e., averages, and variances. Other descriptive statistics were maximum and minimum values. In addition, correlation matrix of all the variable associations, was generated. Regression analysis model summary, ANOVA and model coefficient tables were generated. From the analysis, the study found that adjusted R2 was 23.1%. Therefore, the model explained 23.1% of the ROA variation as independent variables (interest, market size, inflation and exchange rate) varied. R was 53.7% and therefore, the model exhibited a moderate correlation between the independent variables and ROA. The ANOVA indicated a significance of 0.002 which was less than alpha (0.05) used in the test of significance. The model found that average lending rate had a significant and weak inverse influence on ROA. One-unit variation in lending rate had an impact of 0.012 units. Inflation rate had an insignificant and a weak positive effect on ROA. One-unit variation in inflation resulted in 0.004 units change in ROA. Exchange rate effect was negative and weak on ROA, but significant. ROA declined by 0.004 units as exchange rate rose by one unit. Market size index had a significant, weak and positive effect on ROA. ROA varied by 0.001 units due to one-unit change in market size index. From the findings, it is recommended that the variability of macroeconomic variables be checked by the regulating authority as their overall effect on performance is 53.7%. this would safeguard the MFBs’ returns.