Effect of Project Financing on Profitability of Microfinance Institutions in Kenya

Abstract

The research delved into the influence of project financing on profitability of microfinance institutions (MFIs) operating within the Kenyan context. The comprehensive review of literature and theoretical frameworks, including Agency Theory, Resource-Based View, and financial intermediation theory, laid the foundation for empirical investigation. Methodologically, secondary data on project financing, liquidity, loan portfolio, financial indicators were analyzed using regression analysis. Key findings revealed a strategic emphasis on business loans in the microfinance loan portfolio, showcasing adaptability in response to market dynamics. Project financing analysis exposed nuanced strategies, with MFIs exhibiting higher interest rates and fees compared to commercial banks. Profitability varied among MFIs, emphasizing the need for tailored approaches to enhance financial sustainability. Liquidity and loan portfolio analyses provided insights into short-term financial capabilities and risk management. Regression analysis demonstrated a positive relationship between liquidity and profitability, highlighting the importance of effective liquidity management. The weak relationship between loan portfolio and profitability suggested that loan portfolio alone might not predict profitability. The study identified untapped potential in project financing, with only 13% of MFIs engaging in this area. The analytical model, incorporating project financing, liquidity, and loan portfolio, explained 99.4% of profitability variability, validating its predictive power. Thus, the study contributes valuable insights for policymakers, practitioners, and researchers in enhancing the effectiveness and sustainability of microfinance initiatives. The findings align with theoretical perspectives, emphasizing the critical role of liquidity and internal resources in influencing profitability. The study challenges conventional financial theories, suggesting the need for tailored frameworks for the microfinance sector. Ongoing research and adaptive strategies are crucial for sustaining the positive impact of MFIs on economic development.