The Effect of Firm Size on Profitability of Microfinance Banks in Kenya

Abstract

Large banks are complex and diversified; they have different product lines and integrated services that enable them to be more efficient and to invest in huge investments that are risky and long-term in nature. Such firms benefit from economies of scale as compared to smaller firms because their average production costs are less and while their operational activities are efficient. Descriptive research design was used to examine the effect of bank size on profitability. The population for this study involved nine Microfinance banks that were operational during the study period. A period of five years was (2011-2015) covered and data was obtained from CBK website. Analysis of data was done with the help of descriptive and inferential statistics. It was found that bank size, customer deposits, operating efficiency increased with the study period. Non-performing loans were found to increase posing credit risks to MFBs. A strong positive correlation was found to exist between operating efficiency and profitability. In addition, a weak correlation between bank size and profitability was found to exist. Further, it was found that operating efficiency and bank size were found to be significant as their probability ratios were lower than five percent. Customer deposits, asset quality and liquidity were insignificant as their probability ratios were higher than five percent. Microfinance banks ought to increase their network of branches countrywide to attract new customers to open new accounts and in so doing increase their deposits. This will increase the pool of funds for investment and impact positively on the profitability of MFBs. Some data from specific variables such as growth in customer deposits were missing in the year 2010 of the annual statements. This affected the quality of the sources of data and adequacy to enable the researcher to establish accurate and more findings on the nexus between bank size and profitability MFBs. A duplication of this study should be executed in a different industry other than the banking sector such as the manufacturing firms. This will give room for comparison that might lead future researchers to a more plausible conclusion so that relevant recommendations can be reached. 8