Firm Characteristics and Non-Performing Loans of Microfinance Banks in Kenya
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Date
2023
Authors
Boye, Hussein Rob
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Microfinance banks in Kenya have continued to experience challenges of loan defaults which
negatively impact their asset quality and performance. As a result of loan default, many of these
institutions have suffered significant losses. The goal of this study was to see how firm factors
affect non-performing loans at Kenyan microfinance institutions. One of the specific goals was
to examine the effect of leverage, business size, liquidity, and capital sufficiency on nonperforming loans. Institutional theory, credit crunch theory, and liquidity preference theory
inform the study. The research design was descriptive. The study's intended audience consisted
of 13 Kenyan microfinance institutions. Secondary data was gathered for six years, from 2016
to 2021. The information was gathered from the respective microfinance institutions' annual
records as well as the Kenyan Central Bank. Diagnostic tests including normality,
multicollinearity, heteroskedasticity, autocorrelation, and Hausman tests were conducted. The
analysis was premised on descriptive and inferential analyses. Descriptive analysis was
undertaken first to give general research variables characteristics. These range from minimum,
maximum values, standard deviation and mean. Correlation analysis was conducted to ascertain
the direction as well as the extent of association among the research variables. Multiple
regression model was used to establish the effect of firm characteristics on non-performing loans
in Kenyan microfinance banks. The researcher acknowledged all sources from where
information used was borrowed. The researcher sought approval letters from relevant authorities
before undertaking data collection. The findings showed that leverage significantly and
favorably affected non-performing loans. Non-performing loans were negatively and
significantly affected by firm size. Microfinance banks' non-performing loans were not
significantly affected by liquidity or capital adequacy. The study's conclusions suggest that
lowering the debt ratio of microfinance banks will undoubtedly lead to a reduction in nonperforming loans. By expanding the asset base, there is a greater chance that the non-performing
loans of the microfinance banks will be reduced. Increasing liquidity and capital adequacy
would not have a substantial effect on the non-performing loans of the microfinance banks. The
management of the microfinance banks should review the debt policies with aim of reducing
over reliance on debts, should strengthen the equity policy that will lead to low leverage, should
develop strategic plans aimed at strengthening and growing the asset base. The management
should particularly channel most of the payoffs from investment in asset acquisition. The
policymakers in the financial sector especially central bank of Kenya should streamlining policy
implementation toward loan defaulters. Academicians and researchers should review the
empirical findings of this study in building their research work on related topics.
Description
A Research Project Submitted to the School of Business, Economics and Tourism in Partial Fulfilment of the Requirements for the Award of the Degree of Master of Business Administration (Finance), Kenyatta University, June 2023.
Keywords
Firm Characteristics, Non-Performing Loans, Microfinance Banks, Kenya