The effect of micro and macro economic variables on the financial performance of deposit taking Microfinance Banks in Kenya
Effective financial management is a key to success for any business and being aware of external and internal factors of financial risk is vital to mastering the art and science of good financial performance. The Kenyan micro-banking industry has enjoyed a steady growth and stability during the last decade. Empirical studies conducted recently demonstrate that Kenyan finance sector is sound and well-equipped to withstand some of the internal and external shocks. However, the profitability and efficiency are some of the challenges faced by the banks to strengthen their financial positions in order to meet the risks associated with openness and globalization. This study sought to examine the effect of Micro and macroeconomic factors on the financial performance of microfinance banks in Kenya. Specifically to study whether Liquidity, Bank size, Capital adequacy, Market power, Inflation and GDP affect ROA. This study used a descriptive research design and covered a five year period from 2010-2014. A population of nine MFBs in Kenya as at 31st December, 2014 was used. Secondary data was collected from the reliable websites and, annual reports of MFBs. A multiple regression analysis model and statistical softwares of SPSS and Excel used in data analysis. The findings point out that micro and macro variables i.e. Liquidity, Bank size, Capital adequacy, Market power, Inflation except GDP positively affect financial performance of Micro of microfinance banks. The study concludes that Liquidity, Bank size, Market power, Inflation and GDP have no significant effects on the financial performance of microfinance banks. This study also concludes that out of the variables that turn out to positively affect financial performance, it is only capital adequacy significantly affects the return on asset of the microfinance banks in Kenya. The study recommended that strategies to facilitate increased a favorable microeconomic environment of MFBs should be adopted by management for a good financial performance. It further recommended that the supervisory body of macroeconomic environment like Inflation and GDP should ensure viable environment for micro banking.