Effect of Electronic Banking on Financial Performance of Microfinance Institutions in Kenya

Abstract

MFIs in Kenya play a role in financial intermediation which has included 2.9% Kenyans. The last decade has seen MFIs in Kenya embrace electronic banking. This innovation of electronic banking has revolutionized the convenient means of accessing financial services. Electronic banking platforms are perceived as enablers for formal financial services through remote transactions. The current study sought to investigate how this influences the financial performance among MFIs in Kenya as they play a key role in financial intermediation and inclusion. The independent variables for the research were mobile banking, internet banking and ATMs. Credit risk, liquidity risk, capital adequacy and MFI size were the control variables while the dependent variable was financial performance measured as ROA. The study was guided by financial intermediation theory, diffusion of innovation theory and technology acceptance model. Descriptive research design was utilized in this research. The 47 MFIs in Kenya as at December 2021 served as target population. The study collected secondary data for five years (2017-2021) on an annual basis from CBK and individual MFIs annual reports. Descriptive, correlation as well as regression analysis were undertaken and outcomes offered in tables followed by pertinent interpretation and discussion. The research conclusions yielded a 0.530 R square value implying that 53% of changes in MFIs ROA can be described by the seven variables chosen for this research. The multivariate regression analysis further revealed that individually, mobile banking has a positive and significant effect on ROA of MFIs (β=0.162, p=0.001). Internet banking and ATMs exhibited a positive but not statistically significant influence on ROA. Both credit risk and liquidity risk have a negative effect on ROA of MFIs as shown by (β=-0.157, p=0.000) and (β=-0.160, p=0.000) respectively. Capital adequacy and firm size exhibited a positive and significant ROA influence as shown by (β=0.739, p=0.000) and (β=0.293, p=0.000) respectively. The study recommends the need for policy makers to provide a conducive environment for MFIs to undertake mobile banking as this enhances their financial performance. The study further recommends that MFIs should work at reducing their liquidity risk and credit risk as these two adversely affects ROA. Future research ought to focus on other financial institutions in Kenya to corroborate or refute the conclusions of this research.