Financial Outreach and Financial Sustainability of Licensed Deposit Taking Microfinance Institutions in Nairobi City County, Kenya
Mutua, Rabecca Nundu
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Deposit Taking Microfinance institutions have increased in number through issuance of license by Central Bank of Kenya. The trend of financial sustainability for deposit taking microfinance institutions overall sector over the years has been below the threshold except for 2013 when operating self-sufficiency was only achieved. In the year 2017 the sector was hit by loss making whirlwind with only Faulu staying afloat thus raising an alarm that financial sustainability needed to be checked. There are two major obstacles that Microfinance Institutions are facing such as financial sustainability and financial outreach. The economic goal of sustainability in line with vision twenty thirty makes these institutions not to be left out hence under spotlight. Therefore, there is need to examine whether they are financially sustainable to continue serving the low-income earners, heaving them out of poverty and boost the economy of Kenya. It is better not to start any institution than starting it and fail to accomplish its mission in the long run. For Deposit Taking Microfinance Institution to increase financial outreach, it must be operationally sustainable. The study objectives involved determining the existence of relationship between breadth of outreach, depth of outreach, cost of outreach, establishing the relationship between experience of institution and financial sustainability of Deposit Taking Microfinance Institution in Nairobi county, Kenya. Finally, to determine the moderating effect of credit risk management on the relationship between financial outreach and financial sustainability of Deposit Taking Microfinance Institution in Nairobi County, Kenya. The study was anchored on three relevant theories which were: Financial Intermediation theory, Life Cycle theory, Institutionalist theory. Past literature was reviewed with an aim of identifying the research gaps to be filled thus appraised the study. The study employed a positivism research philosophy to determine the relationship between financial outreach and financial sustainability. A population of 13 licensed Deposit Taking Microfinance Institution was considered for this study. Census method was preferred due to small number of target population. A static Panel linear regression model with fixed effect was developed for both operating self-sufficiency and financial self-sufficiency. Secondary data was obtained from Central Bank of Kenya from audited financial statements. Inferential analysis method was employed using Stata statistics software then descriptive statistics tool such as mean and standard deviations were used. several diagnostic tests were conducted namely: normality, multicollinearity, heteroscedasticity, serial correlation, stationarity and Hausman. The study found that number of active clients (breath of outreach) had statistically significant relationship; Average loan size (depth of outreach) had insignificant; age of firm (experience of institution) had insignificant relationship on financial sustainability of DTMFIs in Nairobi county, Kenya. The moderating effect between credit risk management (portfolio at risk) and breadth of outreach (number of active clients)was positive while portfolio at risk and experience of institution (age) and depth of outreach (average loan size) was negative on the relationship between financial outreach and (OSS and FSS) financial sustainability. Further, loan loss provision coverage had positive interaction with number of active clients, age, and average loan size on the relationship between financial outreach and financial sustainability of DTMFIs in Nairobi county, Kenya. The study recommended that the government through Central Bank of Kenya should formulate policies that enhance savings with DTMFIs and therefore encourage financial inclusion. Further, DTMFIs should engage in vigorous financial education to boost financial facilities’ awareness to boost the breadth of outreach and get involved in information collection and sharing to mitigate credit risk.