Effects of Internal Factors on the Financial Performance of Licensed Deposit-taking Microfinance Institutions in Kenya

Abstract

This study sought to determine how internal factors affect the financial outcomes of Kenya's licensed deposit-taking microfinance institutions. A descriptive research strategy was used to define the goal. The study's population consisted of 13 Kenyan microfinance institutions licensed by the CBK to take deposits. The study used secondary data that spanned the years 2017 to 2021. The data comprised several variables including return on assets, managerial effectiveness, liquidity, capital sufficiency, asset quality, and firm size, and concentrated on the independent variables and their impact on the dependent variable, financial performance. Both inferential and descriptive statistics were used to analyse the quantitative data that was collected. The R square was 0.612, as was evident from the model summary table. This means that when firm size, asset quality, capital sufficiency, liquidity, and management efficiency were fitted as predictor variables, they were able to account for 61.2% of the overall variation in financial performance. The F-statistic was 21.514 at a threshold of significance of 0.00, according to the ANOVA table. In light of this, the model fit with predictor variables of firm size, managerial efficiency, asset quality, capital sufficiency, and liquidity was statistically fit to forecast financial performance. According to the study's findings, firm size had an increasing effect on financial success. This meant that larger MFIs would outperform smaller MFIs in terms of fiscal performance. Additionally, these findings suggested that MFIs should focus on strategic elements that may affect their growth trajectory and consequently, financial performance. Asset quality was also found to be a positive predictor of financial performance. It was thus noted that the MFIs needed to maintain a portfolio that had more performing loans as compared to the non-performing ones. Financial performance was found to be positively predicted by capital adequacy. These findings indicated how crucial it is for MFIs to keep sizeable capital reserves to protect them from economic downturns. Additionally, it was discovered that liquidity was a good indicator of financial performance. These findings highlight the necessity for MFIs to retain adequate cash so that they can timely and adequately satisfy their financial obligations. Additionally, it was shown that management effectiveness was a good indicator of financial performance. These results demonstrated the importance of having a strong management team at MFIs. In light of the study’s conclusions, the research recommends that to maintain high asset quality it is imperative for the MFIs to diversify their loan portfolio to reduce the risks associated with them. It is also recommended that the MFIs put mitigation strategies in place that ensure that performing loans are always more than non-performing loans. The study also recommends that the MFIs regularly check their capital adequacy. This is in a bid to ensure that the MFIs are always in a position to have enough capital reserves that could cushion them from financial strains that could be experienced in the economy. This research also recommends that the MFIs develop rigorous liquidity policies that can test and identify vulnerabilities. In addition, it is recommended that they maintain adequate cash reserves to cover short-term obligations and potential cash flow changes. It is also recommended that management teams of the MFIs embrace technological advancements to help them become more efficient.