Relationship Between Loan Default and Profitability of Deposit Taking Microfinance Banks in Kenya

Abstract

The study sought to establish the relationship between loan default and profitability of deposit taking microfinance banks in Kenya. This study was based on the bad management hypothesis and loanable fund theory. The study adopted a correlational research design targeting fourteen microfinance banks in Kenya between 2018 and 2022. The researcher assumed a data collection sheet in collecting the data. The data was secondary in nature and gathered from the bank supervision reports got from the CBK website. The data was in absolute form and collected using data collection sheet. The study was analyzed through descriptive and inferential statistics. The study was based on panel regression model. The statistics were generated with the assistance of SPSS version 26. The significance of the model was checked through F-statistics. From the findings, loan defaults had an insignificant negative effect on profitability. On the other hand, liquidity had a positive insignificant effect on profitability. Nevertheless, firm size and capital adequacy had a positive effect on profitability. This study concludes that loan default has no significant effect on profitability of deposit taking microfinance banks in Kenya. Similarly, liquidity has no significant effect on profitability of deposit taking microfinance banks in Kenya. However, firm size and capital adequacy have a positive effect on profitability of deposit taking microfinance banks in Kenya. From the findings, the study recommends that management of deposit taking microfinance banks in Kenya reduce the loan defaults levels by recruiting debt collectors and streamlining the loan collection procedures. It also recommends that the management increase their current assets and reduce the current liabilities within their banks for increased profitability. They also need to purchase more assets and/or revalue their assets for an increased profitability. The management of deposit taking microfinance banks in Kenya also need to increase their capital adequacy ratio through increased core capital and reduced total weighted assets for increased profitability. Future studies can look a similar research based on other factors influencing the profitability; different measures of loan default and profitability; other financial institutions other than deposit taking microfinance banks; primary data; and semi-annual or quarterly data.