LIQUIDITY REGULATION AND PROFITABILITY GROWTH OF MICROFINANCE BANKS IN KENYA

Abstract

Microfinance banks, MFBs, being deposit-taking institutions providing financial services to the low-income segment of the market, strike a balance in complying with the regulator’s requirements as well as maintaining their financial growth through profit achievement. Three commercial banks were placed under receivership by the Kenyan regulator Central Bank of Kenya CBK between August 2015 and April 2016, and CBK reacted by providing a facility to all banks including MFBs facing liquidity problems. The problem statement was to determine the relationship between liquidity regulation and capital adequacy regulation on profitability growth of MFBs in Kenya that previous studies had not done in the period between 2013 and 2017 using secondary quantitative data and measurements prescribed by CBK. This study examined liquidity regulation and profitability growth of microfinance banks in Kenya in the period of 2013 to 2017. The main objective of the study was to establish the effect of liquidity regulation on profitability growth of MFBs in Kenya. Specific objectives included investigating the effect of liquidity ratio and capital adequacy on profitability growth of Kenyan MFBs. The theory that underpinned this study was the public interest theory and was complemented by the shiftability theory and buffer theory. The study adopted quantitative explanatory research design. The target population was the 13 MFBs licensed as at December 31, 2017. Inclusion-exclusion criteria was used to determine the size of sample from the population to be used, whereby 9 MFBs licensed in the entire five-year study period of 2013 to 2017 were analyzed while 4 MFBs licensed between 2015 and 2017 being a lesser period than the five-year study period were not analyzed. The list of licensed MFBs from the CBK was used as the sampling frame. The study focused on secondary data that was analyzed. The multiple regression model used logarithm to bring uniformity. Descriptive and inferential statistics analytical tools were used. The findings were presented in form of tables, graphs, charts and short narrations. The study results found a positive relationship between liquidity ratio, LR, and profitability growth, PG, at 0.036, and capital adequacy, CA, and profitability growth at 0.601. A statistically significant relationship was found that existed between LR and CA with profitability growth at p = 0.000. A unit increase in LR results in a 0.084 increase in PG and a unit increase in CA results in a 0.607 increase in PG. The study concluded that the relationship between liquidity regulation and profitability growth of MFBs was statistically significant and positive where a unit increase in liquidity resulted in an increase in profitability growth hence regulation being for the interest of the public whom the MFBs serve as the MFBs profitably operate is good. The study recommended that regulators and policymakers introduce a requirement for MFBs to hold unencumbered high quality liquid assets to survive a 30-calendar day liquidity stress scenario, and the study supported the proposed increment of core capital requirement for the MFBs. Also recommended was further research on capital adequacy ratios as prescribed by the regulator, and their effect on profitability growth of MFBs.