Effect of Non-performing Loans on Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Abstract

This paper sought to determine the effect of non-performing loans on financial performance0of deposit taking microfinance institutions0in Kenya. It was based on the moral hazard, bad management, loanable fund and asymmetry theories. The paper adopted descriptive design to collect data from thirteen DTMFIs in Kenya joining 2016 and 2021. Annual secondary data was collected. Data was mined from bank supervision reports from central bank of Kenya as well as annual reports of individual firms using a data collection schedule. STATA-14 was used for generation of descriptive and regression statistics. Diagnostic tests of normality, model specification, Heteroscedasticity and Multicollinearity were done to check on assumptions of the regression model. From the descriptive statistics, in the period joining 2016 and 2021, the firms showed negative return of equity. Nonperforming loans ratio was high for the selected firms. From the regression analysis, NPLs had nonsignificant direct effect on financial performance of DTMFIs indicating that NPLs have no effect on financial performance of DTMFIs in Kenya. Capital structure as measured by debt-to-equity ratio showed a negative significant effect on financial performance. This indicates that capital structure has a negative effect on financial performance of DTMFIs in Kenya. An increase in capital adequacy was discovered to decrease financial performance insignificantly. This indicates that capital adequacy has an insignificant effect on financial performance of DTMFIs in Kenya. Firm liquidity showed a negative and insignificant regression coefficient with financial performance. This shows that firm liquidity has an insignificant effect on financial performance of DTMFIs in Kenya. This paper recommends that DTMFIs in Kenya increase their income levels; maintain an optimal level of NPLs in their portfolio; reduce the debt levels in their capital structure; increase the level of deposits in their firms; and reduce the liquidity levels of their firms. Similar researchers can do a similar paper based on other factors affecting financial performance; focus on other sectors other than DTMFI sector; adopt different measures for NPL and financial performance; adopt different periods of paper; adopt quarterly or semi-annual data; and adopt other data analysis methods.