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

Abstract

Microfinance banks in Kenya have been experiencing organizational efficiency and size problems in the recent years. This study sought to establish the effect of organization size on efficiency of microfinance banks in Kenya. The researcher measured organization efficiency in terms of operating expense ratio. Organization size was measured through natural log of assets. Liquidity and asset quality were used as the control variables. The study was guided by stake holder theory, transaction theory and agency theory. This study adopted a descriptive research design. The population was 13 Microfinance banks in Kenya. The six microfinance banks that existed between 2011 and 2020 were involved. The study gathered secondary data. from financial statements in the individual firms for ten years (2011-2020). Annual data was analyzed using Stata version 14. The study used descriptive and regression statistics to establish the effect of size on efficiency. This study sought to determine the effect of organization size on the efficiency of the microfinance banks in Kenya. The study found that, between 2011 and 2020, microfinance banks showed a mean organization efficiency as measured by operating expense ratio of 93.96%; organization size as measured by log of total assets of 14.716%; asset quality as measured by non-performing loans ratio of 35.145%; and mean liquidity as measured by liquidity ratio of 48.647%. Regression results showed a between R squared value of 0.7179. The findings also showed that organization size had a significant positive effect on organization efficiency of microfinance banks. In addition, asset quality showed a significant negative effect on organization efficiency while liquidity showed a negative insignificant effect on organization efficiency. The study concludes that microfinance banks in Kenya have a high operating expense ratio, high asset quality and low liquidity. It also concludes that organization size has a significant positive effect on organization efficiency of microfinance banks in Kenya with asset quality showing a negative relationship. Liquidity had no effect on organization efficiency of microfinance banks in Kenya. For practice, the study recommends that the management of microfinance banks in Kenya should reduce their level of operating expenses, increase their operational income and reduce the level of non-performing loans.