Firm Characteristics, Interest Rate and Financial Performance of Microfinance Banks in Kenya
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Date
2024-10
Journal Title
Journal ISSN
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Publisher
International Academic Journal of Economics and Finance
Abstract
Microfinance Banks gives the forte to improve the economic activity of low-income individuals and eliminate
poverty, resulting in economic progress. However, microfinance's Banks financial performance in Kenya has
declined over time. The objective of this study is to investigate firm characteristics, interest rate and financial
performance of microfinance banks in Kenya. The study was grounded on buffer capital, efficiency structure and
interest rate parity theories. The study research methodology rested on positivism research philosophy. Research
design was explanatory non-experimental design. Secondary panel data was utilized. 13 microfinance banks in
Kenya were target. Information was gathered using secondary data sources from microfinance banks accounting
report from 2016 to 2022. Data was analysed using descriptive and inferential statistics. The study used multiple
regressions and Pearson’s Product Moment Correlation analysis. All ethical considerations were appropriately
observed. Findings indicated that adequacy of capital exerts a notable and direct effect on financial performance,
underscoring the importance for microfinance banks in Kenya to prioritize maintaining sufficient capital levels
to support their overall stability and financial outcomes. Conversely, quality of asset demonstrates a significant
and adverse influence on performance financially, highlighting the need for microfinance banks to enhance their
credit assessment processes to ensure the quality of their loan portfolios. The research revealed that efficiency of
management has an insignificant direct influence on financial performance of Microfinance banks. To address
this, microfinance banks are advised to invest in comprehensive management training programs and capacitybuilding initiatives to improve operational effectiveness and decision-making processes. Earning ability, on the
other hand, exhibits a considerable and direct influence on financial performance. Microfinance banks should
thus focus on continuous innovation of their products and services to enhance their earning potential and overall
financial outcomes. Liquidity levels exhibit an insignificant and inverse effect on the financial performance
outcomes. To mitigate potential risks, microfinance banks should establish comprehensive policies and
procedures to monitor and manage liquidity effectively. Interestingly, the study reveals that the connection
concerning firm-level attributes and financial outcomes for microfinance institutions in Kenya does not appear
to be subject to a substantial moderating influence from interest rate movements. Therefore, the survey
recommends that microfinance banks concentrate on improving governance structures, operational efficiency,
risk management practices, and asset quality. This can be achieved through capacity-building programs, training
initiatives, and adopting best practices from successful microfinance institutions. Strengthening these firm
characteristics will enable microfinance banks to enhance their financial performance, irrespective of interest
rate fluctuations
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Citation
Ouma, C. O., Makori, D., & Aluoch, M. O. (2024). Firm characteristics and financial performance of microfinance banks in Kenya. International Academic Journal of Economics and Finance, 4(3), 164-193.