Effect of Non-performing Loans on Financial Performance of Deposit Taking Microfinance Institutions in Kenya
Abstract
This paper sought to determine the effect of non-performing loans on financial
performance0of deposit taking microfinance institutions0in Kenya. It was based on the moral
hazard, bad management, loanable fund and asymmetry theories. The paper adopted
descriptive design to collect data from thirteen DTMFIs in Kenya joining 2016 and 2021.
Annual secondary data was collected. Data was mined from bank supervision reports from
central bank of Kenya as well as annual reports of individual firms using a data collection
schedule. STATA-14 was used for generation of descriptive and regression statistics.
Diagnostic tests of normality, model specification, Heteroscedasticity and Multicollinearity
were done to check on assumptions of the regression model. From the descriptive statistics,
in the period joining 2016 and 2021, the firms showed negative return of equity. Nonperforming
loans ratio was high for the selected firms. From the regression analysis, NPLs
had nonsignificant direct effect on financial performance of DTMFIs indicating that NPLs
have no effect on financial performance of DTMFIs in Kenya. Capital structure as measured
by debt-to-equity ratio showed a negative significant effect on financial performance. This
indicates that capital structure has a negative effect on financial performance of DTMFIs in
Kenya. An increase in capital adequacy was discovered to decrease financial performance
insignificantly. This indicates that capital adequacy has an insignificant effect on financial
performance of DTMFIs in Kenya. Firm liquidity showed a negative and insignificant
regression coefficient with financial performance. This shows that firm liquidity has an
insignificant effect on financial performance of DTMFIs in Kenya. This paper recommends
that DTMFIs in Kenya increase their income levels; maintain an optimal level of NPLs in
their portfolio; reduce the debt levels in their capital structure; increase the level of deposits
in their firms; and reduce the liquidity levels of their firms. Similar researchers can do a
similar paper based on other factors affecting financial performance; focus on other sectors
other than DTMFI sector; adopt different measures for NPL and financial performance; adopt
different periods of paper; adopt quarterly or semi-annual data; and adopt other data analysis
methods.
Publisher
University of Nairobi
Rights
Attribution-NonCommercial-NoDerivs 3.0 United StatesUsage Rights
http://creativecommons.org/licenses/by-nc-nd/3.0/us/Collections
- School of Business [1411]
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