Prudential Regulatory Framework and Financial Performance of Microfinance Institutions in Kenya
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Date
2024
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International Journal of Managerial Studies and Research
Abstract
The rising number of non-performing loans and insufficient cash among Micro Financial Institutions have been ongoing issues despite prudential regulations being in place to enable the Central Bank of Kenya to supervise them. Therefore, the objective of this investigation was to ascertain how the prudential regulatory environment affected Kenya's micro financial organizations financial performance. The study's specific goal was to investigate how credit risk, liquidity requirements, capital requirements, and microfinance size affect financial performance. Liability management theory, the buffer theory of capital adequacy, agency theory, and the shiftability theory of liquidity served as the study's pillars. In this study, causal research design was adopted. As of December 31, 2019, the 13 microfinance institutions in Kenya that were officially listed on the website of the Central Bank of Kenya constituted the population of this study. Document reviews of information found in publicly available financial statements and annual reports for the preceding five years, from 2016 to 2020, were employed as secondary data for the study. Return on Assets was used to gauge the financial success of Micro Institutions. Data analysis was performed using both descriptive and inferential analyses. The findings of the investigation indicated that, while the size of Kenyan microfinance institutions had no statistically significant effect on their performance, the capital and liquidity criteria had a significant effect. Furthermore, Microfinance institutions in Kenya were not found to have a statistically significant relationship with credit risk and profitability. The study came to the conclusion that an MFI's need for liquidity decides whether it can meet its short-term loan obligations and whether it can use its current or liquid assets to pay its current liabilities. Since lowering overhead has a direct influence on profitability, the study advised that the micro financial institutions examine their overhead costs and look for possibilities to do so. The microfinance organizations should raise their capital requirements by increasing profits, selling long-term assets for cash, acquiring funds through the issuance of preferred or common stock in return for cash; obtaining long-term financing, and doing all of the above. Lending should be done by microfinance organizations to a variety of clients, including consumers, small enterprises, and big businesses.
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Nuriye, A.A. & Gatauwa, J.M. (2024). Prudential Regulatory Framework and Financial Performance of Microfinance Institutions in Kenya. International Journal of Managerial Studies and Research Vol. 12, Issue 4.