Moderation Effect of Interest Rates on the Nexus between Firm Characteristics and Financial Stability of Microfinance Banks in Kenya

Abstract

Microfinance institutions provide financial services in small scale to the unbanked who are unable to receive credit from the formal banking sector and as well as other standard financial systems. However, over the years, the financial stability of microfinance banks in Kenya has attracted key consideration from policy makers. The study sought to assess the moderating effect of interest rates on the relationship between firm characteristics and financial stability of Microfinance Banks in Kenya. The study is guided by Financial Intermediation Theory. The study targeted the 13 microfinance banks in Kenya, hence a census study. The study concluded that interest rates had significant moderating effect (β=34.223, p=0.000) on the relationship between firm characteristics and financial stability of Microfinance Banks in Kenya. The study also presented a workable empirical model on firm characteristics, interest rates and financial stability as it statistically established significance on the nexus between these variables. The study recommends that the setting of interest rates should be guided by the underlying economic conditions of the country