Digital Financial Services and Profitability of Microfinance Banks in Kenya
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Date
2025
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Publisher
Kenyatta University
Abstract
It is evident that the Microfinance banks play pivotal roles in the economy, be it the developed or emerging ones from the global viewpoint. These institutions positively add value to social-economic spheres such as poverty eradication, creation of employment and growth in Gross Domestic Product of many countries. Contrary, the Return on Assets profitability levels has been declining over the last five years since 2019 and the conceptual link between online banking service adopted by these financial institutions and the corresponding profitability remain unclear. This study's primary intent was to ascertain how digital financial services influenced Kenyan microfinance banks performance in terms of profitability. More precisely, mobile banking, internet banking, electronic funds transfer and credit card usage effect on profitability of microfinance banks in Kenya were the specific objectives. Transaction Cost Economics, Innovations Theory of Profits, and Technology Acceptance Model theories are the ones which underpin the current study concepts used herein. The research design utilized here is causal research design. The research populace consists of 14 microfinance banks in Kenya which were surveyed in order to collect data from this small group. Drop and pick method was employed to collect data, with all organized surveys being given to research respondents who are the senior managers of the Microfinance Banks. The gathered data was subjected to diagnostic testing, including tests for linearity, and multicollinearity, homoscedasticity, and normalcy. Following this, the data was evaluated using additional descriptive and inferential techniques to test the general evolution of the study variables and each hypothesis respectively. The research findings portrayed that mobile banking significantly affected profitability of microfinance banks in Kenya in a direct manner, while internet banking also affected profitability of microfinance banks in Kenya which was significant and direct. On the other hand, electronic funds transfer caused statistically major impact on profitability which was straightforward. Credit card usage had a direct and significant effect on profitability. The management of microfinance banks need to adopt less costly mobile banking approaches when meeting their digital clients’ needs for this will boost the profitability thereof. With reduced cost, it will assure a direct and effective boosting of the financial performance for there is a negative link between cost and earnings of an entity. Regulators including Central Bank of Kenya should develop digital financial services policies which guide on the protection of both the producers and consumers of digital financial services. This research is the first of its sort in the academic horizon for theoretical concerns about the relationship between digital financial services and microfinance bank profitability, and it serves as a foundation for further determining whether they are adjusting or intervening elements that may impact the present model in this research.
It is evident that the Microfinance banks play pivotal roles in the economy, be it the developed or emerging ones from the global viewpoint. These institutions positively add value to social-economic spheres such as poverty eradication, creation of employment and growth in Gross Domestic Product of many countries. Contrary, the Return on Assets profitability levels has been declining over the last five years since 2019 and the conceptual link between online banking service adopted by these financial institutions and the corresponding profitability remain unclear. This study's primary intent was to ascertain how digital financial services influenced Kenyan microfinance banks performance in terms of profitability. More precisely, mobile banking, internet banking, electronic funds transfer and credit card usage effect on profitability of microfinance banks in Kenya were the specific objectives. Transaction Cost Economics, Innovations Theory of Profits, and Technology Acceptance Model theories are the ones which underpin the current study concepts used herein. The research design utilized here is causal research design. The research populace consists of 14 microfinance banks in Kenya which were surveyed in order to collect data from this small group. Drop and pick method was employed to collect data, with all organized surveys being given to research respondents who are the senior managers of the Microfinance Banks. The gathered data was subjected to diagnostic testing, including tests for linearity, and multicollinearity, homoscedasticity, and normalcy. Following this, the data was evaluated using additional descriptive and inferential techniques to test the general evolution of the study variables and each hypothesis respectively. The research findings portrayed that mobile banking significantly affected profitability of microfinance banks in Kenya in a direct manner, while internet banking also affected profitability of microfinance banks in Kenya which was significant and direct. On the other hand, electronic funds transfer caused statistically major impact on profitability which was straightforward. Credit card usage had a direct and significant effect on profitability. The management of microfinance banks need to adopt less costly mobile banking approaches when meeting their digital clients’ needs for this will boost the profitability thereof. With reduced cost, it will assure a direct and effective boosting of the financial performance for there is a negative link between cost and earnings of an entity. Regulators including Central Bank of Kenya should develop digital financial services policies which guide on the protection of both the producers and consumers of digital financial services. This research is the first of its sort in the academic horizon for theoretical concerns about the relationship between digital financial services and microfinance bank profitability, and it serves as a foundation for further determining whether they are adjusting or intervening elements that may impact the present model in this research.
It is evident that the Microfinance banks play pivotal roles in the economy, be it the developed or emerging ones from the global viewpoint. These institutions positively add value to social-economic spheres such as poverty eradication, creation of employment and growth in Gross Domestic Product of many countries. Contrary, the Return on Assets profitability levels has been declining over the last five years since 2019 and the conceptual link between online banking service adopted by these financial institutions and the corresponding profitability remain unclear. This study's primary intent was to ascertain how digital financial services influenced Kenyan microfinance banks performance in terms of profitability. More precisely, mobile banking, internet banking, electronic funds transfer and credit card usage effect on profitability of microfinance banks in Kenya were the specific objectives. Transaction Cost Economics, Innovations Theory of Profits, and Technology Acceptance Model theories are the ones which underpin the current study concepts used herein. The research design utilized here is causal research design. The research populace consists of 14 microfinance banks in Kenya which were surveyed in order to collect data from this small group. Drop and pick method was employed to collect data, with all organized surveys being given to research respondents who are the senior managers of the Microfinance Banks. The gathered data was subjected to diagnostic testing, including tests for linearity, and multicollinearity, homoscedasticity, and normalcy. Following this, the data was evaluated using additional descriptive and inferential techniques to test the general evolution of the study variables and each hypothesis respectively. The research findings portrayed that mobile banking significantly affected profitability of microfinance banks in Kenya in a direct manner, while internet banking also affected profitability of microfinance banks in Kenya which was significant and direct. On the other hand, electronic funds transfer caused statistically major impact on profitability which was straightforward. Credit card usage had a direct and significant effect on profitability. The management of microfinance banks need to adopt less costly mobile banking approaches when meeting their digital clients’ needs for this will boost the profitability thereof. With reduced cost, it will assure a direct and effective boosting of the financial performance for there is a negative link between cost and earnings of an entity. Regulators including Central Bank of Kenya should develop digital financial services policies which guide on the protection of both the producers and consumers of digital financial services. This research is the first of its sort in the academic horizon for theoretical concerns about the relationship between digital financial services and microfinance bank profitability, and it serves as a foundation for further determining whether they are adjusting or intervening elements that may impact the present model in this research.
Description
A Research Project Submitted To The School Of Business Economics And Tourism In Partial Fulfilment Of The Requirement For The Award Of Degree In Master Of Business Administration (Finance) Of Kenyatta University, June, 2025
A Research Project Submitted To The School Of Business Economics And Tourism In Partial Fulfilment Of The Requirement For The Award Of Degree In Master Of Business Administration (Finance) Of Kenyatta University, June, 2025
A Research Project Submitted To The School Of Business Economics And Tourism In Partial Fulfilment Of The Requirement For The Award Of Degree In Master Of Business Administration (Finance) Of Kenyatta University, June, 2025