Abstract:
Purpose: The purpose of this study was to examine the relationship between portfolio quality and financial sustainability of microfinance
institutions in Kenya. Research Design, Data, and Methodology: The analysis was based on a panel dataset of 30 microfinance institutions for
the period of 2010 to 2018. Data was obtained from the Microfinance information exchange (MIX) database, and it was analyzed through
descriptive and inferential statistics with the aid of STATA. Based on the results of the Hausman test, the study adopted the fixed effect regression
model to test the research hypothesis. Results: The study found that portfolio quality had a positive significant effect on financial sustainability of
Microfinance institutions in Kenya (β= 0. 211; p-value < 0.05). For the control variables; firm age had a positive effect (β= 0.773; p-value <0.05),
while firm size (β= -0. 749; p-value < 0.05) had a negative effect on financial sustainability. Conclusions: The study concluded that portfolio
quality has an important influence on the financial sustainability of microfinance institution. The study recommends that managers of
microfinance institutions should devise good collection policies to improve portfolio quality while lessening loan default rate. The portfolio
quality may improve the overall profitability and enhance investor confidence in their strategic decision-making on refinancing
