Efect of Firm-level Factors on the Financial Performance of Microfinance Banks in Kenya

Abstract

Microfinance banks are critical to the development of any economy and they are useful in poverty alleviation and grassroots reach as well as providing financial access to low-income households and businesses. However, in Kenya, MFIs have been struggling, recently reporting performance declines. This study therefore sought to establish the effect of Firm-Level Factors on microfinance institutions’ Financial Performance in Kenya. The study specified liquidity, deposit level, market share and loans quality and their effect on ROA. The study is guided by the trade-off theory and the agency theory. This study used a descriptive research design that targeted 14 registered microfinance banks. The study utilized quantitative panel research data and descriptive and inferential analysis. The findings were then presented in tables and charts. The results were that there is a statistically positive and significant relationship between firm-level factors and financial performance of MFB. Conclusions were that there is no significant effect of liquidity ratio on the MFB FP, deposits ratio and market share have an insignificant effect and firm size had a significant effect. Finally, there was no significant effect of loan quality on MFB’s FP. Recommendations were that MFBs ensure that they maintain adequate liquidity to meet short-term obligations, while also assessing and managing other risks. The study also recommends that smaller MFBs should consider developing strategic growth plans aimed at increasing their size while larger MFBs should leverage their expanded capacity to offer a broader range of financial products and services since diversification can attract a more diverse customer base, generate additional revenue streams, and enhance overall FP. The study also suggested further research on other factors including technological innovations, regulatory changes and macroeconomic factors and their effect on the FP of these microfinance banks.