The Effect of Financial Technology Adoption on the Financial Performance of Microfinance Banks in Kenya

Abstract

The microfinance industry in Kenya is regarded as one of the most dynamic in all of Sub- Saharan Africa. It provides assistance to those who are economically disadvantaged via a wide branch network as well as a variety of institutional businesses. The growth of a traditional banking and financial services industry in Kenya has been hampered by a number of factors that are interconnected and mutually inhibiting. As a result, Kenya has seen an increase in the demand for microfinance. Some of the causes that have been holding back Kenya's banking and finance industry in recent years include the sector's own structure and makeup, a lack of proper regulation and control, and the conservative commercial business practices of profit-focused financial institutions. All three of these things have played a role in the industry not living up to its promise. The study's goal is to analyze how microfinance institutions in Kenya have fared economically after adopting new financial technologies. Two theories underpin this study: the potential for disruptive innovation and the weight of consumer demand. Financial technology (FinTech) is now increasing at an exponential pace, and this will have a significant influence on the banking industry. The present investigation made use of a descriptive study design since its primary objective was to explain the appearance of a particular behavioral trait in response to the influence imposed by an independent variable. The population of the research consisted of all 14 microfinance institutions that were operational throughout the time period between 2018 and 2022. The findings also indicate that there is a positive considerable link between internet banking (r= 0.434, p value <0.05), capital sufficiency (r= 0.612, p value <0.05), bank size (r= 0.382, p value <0.05), and financial success. This indicated that greater levels of financial performance among Kenyan microfinance institutions are associated to mobile banking, internet banking, enough capital, and the size of the bank. R Square was 0.402 in value. This indicated that financial technology use, capital adequacy, and bank size were responsible for 40.2% of the difference in ROA-measured financial performance. It's possible that exogenous causes are responsible for the 59.8 percent that couldn't be accounted for. The authors found that the use of financial technology, such as mobile banking and internet banking, increased financial performance as measured by ROA. The findings from this study constitute the basis for the aforementioned conclusions. This suggests that between 2018 and 2022, microfinance banks significantly improved their efficiency thanks to the use of cutting-edge financial technologies.