Selected determinants, firm age and financial performance of Microfinance Institutions in Kenya

Abstract

Microfinance institutions play significant role in the development of nations in general and developing countries like Kenya in particular. The global Studies indicate that regulatory measures have resulted in decline in the financial performance of MFIs. Whereas the local studies indicate contrary. In Kenya, CBK regulatory framework requires MFIs to adhere to required capital, statutory, operational among other. These regulations are however costly and stringent and may discourage investors from venturing into this sector, thus affecting the performance of MFIs. Specifically, the study sought to examine the effect of management efficiency measures, liquidity management measures and capital adequacy measures on financial performance of MFIs in Kenya. Further, the study examined the moderating role of firm age on the relationship between management efficiency measures; liquidity management measures and capital adequacy measures and financial performance of Microfinance institutions in Kenya. The study was underpinned on the public interest theory, buffer theory of capital adequacy, and regulatory capture theory. Explanatory research design was adopted to establish the causal relationship between the study’s variables by use of panel data. The study targeted a total of 54 registered microfinance institutions in Kenya. However, a sample of 34 MFIs met the criteria, while 20 MFIs though registered did not met the selection criteria and hence were not included in the sample. Secondary data for the period between 2012 -2020 was extracted from annual financial statements of microfinance institutions. The data was analyzed through descriptive and inferential statistics using statistical techniques including Pearson correlation coefficient and regression analysis, hierarchical moderated. The hypotheses were tested through hhierarchical multiple regression model. The study established that management efficiency measures (β= 0.102, p> 0.05); liquidity management measures (β= 0.818, p> 0.05) had a positive and insignificant effect on performance of microfinance institutions. It also established that capital adequacy measures (β= 0.609, p< 0.05) had a positive and significant effect on performance of microfinance institutions. Further, the study established that firm age moderates the relationship between capital adequacy (β= 0.671, p< 0.05) and financial performance of microfinance institutions. By incorporating firm age, this study has proposed and empirically tested and extended the model of selected determinants and financial performance of microfinance institutions. Based on the findings, the study concluded that, firm age moderated the relationship between capital adequacy and financial performance of MFIs. The findings, recommends that MFls should focus more effort on formulating plans, strategies and policies that directly enhance financial performance. It is the recommendation of this study that the CBK should consider reviewing the regulatory framework to allow for more ways of resource mobilization by the MFIs. Finally, the study recommends further studies be done on the role of management efficiency and liquidity management since they was on significance.