Effect of Prudential Regulations on Financial Performance of Microfinance Banks in Kenya

Abstract

Prudential regulations are instituted to prevent too much taking of risks by financial organizations and hence avert possible financial crises. The arguments that favor the prudential regulations on banks extend to MFIs, especially since depositors of an MFI are in a disadvantaged spot in comparison to clients at traditional banks. Most microfinance depositors possess only a small amount of money and a lack of success by MFIs would put them off from partaking in the financial system for an indefinite period. The study sought to determine the effect of prudential regulations on financial performance of microfinance banks in Kenya. The study employed a descriptive research design and the population of the study was made of the thirteen microfinance banks in Kenya as at 31st December 2017. The researcher’s data was secondary in nature and covered a 5 years’ time period covering 2013 to 2017. Analysis of the secondary data gathered was done by use of inferential and descriptive statistics. Inferential statistics entailed regression and correlation and was employed in determining the connection between the variables that are independent and aid in drawing conclusions. The results established that there was a positive and statistically significant relationship between capital adequacy and financial performance and that the relationship between liquidity and financial performance was positive and statistically insignificant while the relationship between loan loss provisions and financial performance of microfinance banks was negative and statistically significant. The results also established that there is a negative and insignificant relationship between asset quality and financial performance of microfinance banks and that firm size has a negative and statistically insignificant effect on financial performance while outreach had a positive and significant relationship with the financial performance of microfinance banks in Kenya. The study did not factor in macro-economic factors that may affect financial performance of MFI and these may be helpful in similar study in future that also analysis a longer period of time.