Financial Management Practices and Financial Performance of Microfinance Banks in Kenya

Abstract

The financial management of microfinance banks (MFBs) in Kenya remains one of the critical issues in the sector, thus, making financial management practices essential in shaping the financial23 performance23of the MFBs. In the recent past, the microfinance banks have continued to register an unstable financial23 performance, evidenced in their annual audited reports and other statistics even when they have been practicing several financial management practices. Hence, the study sought to determine the effect of board characteristics, financing mix, credit default management, and assets and liabilities management practices on financial performance of microfinance banks in Kenya. The study tested hypotheses on a 0.05 significance level. The theories and models adopted were: agency theory, pecking order theory, credit default model, shift-ability theory, and financial outcome model. The study employed explanatory research design. The target population was 13 microfinance banks in Kenya, hence a census survey. The study collected secondary data using a document review guide. The data sources were: published financial statements of each microfinance bank and bank supervision reports from CBK. The time scope was five years from year 2015 to year 2019. The data was analyzed using descriptive statistics, Pearson’s correlation, and panel regression analysis. The data was presented using tables, graphs and figures. Adherence to ethical standards and requirements was observed. The results showed that board characteristics had a negative and significant54 effect on financial performance (β = - 0.827. p = 0.012); financing mix had a 12 positive12 and12 significant12 result on financial performance (β = 0.516. p = 0.014); credit default management had a positive but insignificant effect on financial performance (β = 0.066. p = 0.009); while asset and liability management had2 a 12 positive12 and12 significant12 influence on financial performance (β = 0.216, p = 0.004). The study recommends that firms must form a management team with gender diversity features and they should strive to fund their investment operations using retained profits first, with debt as a last resort, since this is compatible with the pecking order principle, which asserts that funding sources are prioritized. To boost their performance, banks’ management must maintain high levels of net income, thus, aim at increasing earnings before taxes and interests while keeping their loan interest rates on check to ensure that credit default risk is minimized