Effect of Credit Risk on Profitability of Deposit Taking Microfinance Institutions in Kenya

Abstract

The Micro-Finance Institutions spearhead the lending, savings and investment to promote their performance. Therefore, their performance is cushioned by the operational efficiency of loans. Nevertheless, lending is the integral part of microfinance. It aims to boost savings, investment while encouraging circulation of cash between those with surplus and deficits. Moreover, credit is both integral and indispensable phenomenon. Subsequently, it has been part of business transformation as well as the area of concern. Empirically, the credit risk arises whenever the business is stuck and cannot meet the obligations. On the other side, Profitability is a crucial engine towards attainment of objectives. In addition, it is the facet of performance and illustrate the supreme role of matching up income earned according to firm’s policies. The objective of study was to explore the effects of credit risk on profitability of deposit taking microfinance institutions in Kenya. Moreover, the research utilized quantitative descriptive design while targeting 14 Deposit Taking Microfinance Institution in Kenya from 2017-2021 but managed to get 13. The data was sourced from CBK and DTMFIs. The researcher promoted the quality of data by reviewing, classifying, summarizing, editing, coding then analysis through SPSS. Hence, regression analysis and ANOVA among others reinforced in-depth understanding. Similarly, multicollinearity test was undertaken using Variance Inflation Factor. Furthermore, the autocorrelation was done via Kolmogorov-Smirnova to adequately post association between explanatory and explained variable. The normality was enhanced by gauging the normal distribution state of data. Furthermore, correlation analysis posited that adequacy and liquidity management had negative correlation towards the profitability while asset quality showed a strong positive correlation towards profitability. In summary, the autonomous value was 0.154 hence concluding the profitability stood at 15.4%. Further, an increase in a single unit of capital adequacy triggered a negative adjustment on the profitability by 3.5% whenever other enabling factors are held unchanged. Additionally, an increase in a single unit of asset quality translated to drastic increment on the profitability by 52.2% all factors unchanged. Finally, in cases where other variables are held constant, the increase of a singular unit of liquidity portrayed a significant decrease in the profitability by 5%. This investigation recommends for the prudential and maximum engagement resources to increase profitability. The policy makers should analyze the international study and advise the most appropriate plans for enhancing the accountability and wealth creation. The study of financial risk, capital structure, leverage risk and financial stress verse the profitability can give comprehensive knowledge on their pattern and behavior.