Capital Adequacy and the Performance of Micro Finance Institutions in Kenya
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Date
2023
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International journal of Innovative Research and Advanced Studies
Abstract
Microfinance institutions are created with the intention of enhancing and fostering direct participation of impecunious groups and people in well-established enterprises as well as improving their socioeconomic position by offering efficient monetary as well as social assistance. The microfinance industry has nonetheless been affected by poor performance. For instance, the data from Association of Microfinance institutions showed that the performance declined between 2017 and 2018. There was a surge in Kenya’s microfinance sector losses in 2017 which contributed to a dramatic drop in financial income. While the micro-lenders struggle to manage a shifting business environment, losses reported by the sector are eroding the main and total capital levels of MFIs. This paper investigated how the financial success of microfinance organizations in Kenya is impacted by capital sufficiency. It distinctively aimed to determine the effect of management effectiveness on the performance of the microfinance institutions in Kenya, to evaluate the impact of asset quality on that performance, to ascertain the impact of total capital on that performance, and to ascertain the contribution of liquidity on that performance. A descriptive research approach was applied. The paper utilized the fixed effects model in analyzing secondary data collected from 14 Kenyan MFIs from 2017 to 2021. The findings reveal that the performance of microfinance institutions has been declining over the years. Furthermore, capital sufficiency and liquidity improve financial results while asset quality and managerial efficiency have a negative effect. This paper proposes that these institutions should adopt debt collection policies and practices that minimize loanee default rate.
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Citation
Githigia, M.B. & Aluoch, M.O. (2023). Capital Adequacy and the Performance of Micro Finance Institutions in Kenya. International journal of Innovative Research and Advanced Studies Vol. 10, Issue 8.