Effect of Agency Banking Strategy on Performance of Micro Finance Institutions in Nairobi City County, Kenya

Abstract

Micro Finance Institutions play a great role in Kenyan economy in offering banking services to the small, medium and micro enterprises sector in Kenya. The number of contracted agents by Micro Finance Institutions has been increasing significantly since Kenya’s Central Bank gave nod to the implementation of agent banking by Microfinance institutions in 2010. The industry has recorded a total 2,026 microfinance institutions agents as at December 2018. The performance of Microfinance Institutions in the financial year 2018, recorded a significant decline of 131% and an overall loss of 1.4 billion in the financial year 2017 and worse from 377 million recorded in 2016. Reduction in income, increase in operating expenses among other attributes were cited to be the major contributors to the ailing Micro Finance Institution performance. The study investigated the effect of agency banking strategy on the performance of Micro Finance Institutions in Nairobi City County, Kenya. Specifically, to analyze how agency banking transactional volumes influences the performance of MFIs in Nairobi City County, to determine how customer deposits through agents affects the performance of microfinance banks in Nairobi County City, and to investigate how loan repayments via the agency model affect the performance of the MFIs in Nairobi City. Resource based theory, Agency theory, Dynamic Capabilities, Bank led model, and non-bank led approach. The study used descriptive research, and in particular, cross-sectional research study design with the targeted population encompassing 13 microfinance institutions licensed by the CBK with 65 respondents. A semi-structured questionnaire was used in the collection of data from the respondents. Secondary data was gathered from CBK reports and the microfinance institutions ‘audited financial statements. Data was analyzed using multiple regression and descriptive statistics. Percentage and frequency distribution tabulations were employed. The study found that there was an effect of transactional volumes, deposits and loan repayments via agents’ outlets on performance of MFIs in Nairobi. The research recommends that the Microfinance Institutions to embrace Agency Banking as a means to improve performance.