Firms’ Characteristics and Credit Risk of Microfinance Banks in Kenya
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Date
2022
Authors
Momanyi, Jared Nyakundi
Journal Title
Journal ISSN
Volume Title
Publisher
kenyatta university
Abstract
The bank’s contribution in stimulating economy to enhance stability and development cannot be
underestimated. They increase the mobilization of capital for effective investment. In Kenya, the
Microfinance institutions (MFIs) are arguably the most active financial institution in East Africa.
The role of microfinance banks in mobilizing credit in maximizing the welfare of their members
and in Kenya's economic growth and development cannot be underestimated. Kenya's
microfinance banks are known to be among the most vibrant financial institutions in East Africa.
However, microfinance banks face high credit risk due to the high rate of non-performing loans,
which limits their role as intermediaries. As a result, this led to significant losses being recorded
by various banks, such as Faulu Microfinance Bank Limited. In this regard, the influence of
Firms characteristics on the credit risk of microfinance banks in Kenya has been analysed. In
particular, an approach is taken of the impact of management efficiency, liquidity, earning
capacity and capital adequacy on the credit risk of microfinance banks in Kenya. Structural
efficiency theory, agency theory, and safety theory were used as the original theory for the study.
The descriptive study design was applied to analyse 13 Microfinance banks from 2013 to 2020
based on the census method. The secondary data collected were analysed with the help of a panel
regression and descripted statistic method. The findings revealed that the income capacity
depicted significant but negative impact on credit risk. Liquidity depicted a positive and
insignificant influence on credit risk; moreover, inappropriate management efficiency and
depicted a positive influence on credit risk; Capital adequacy depicted an inverse influence on
the credit risk of Kenyan microfinance banks. Moreover, interest rates have a negative regulatory
influence between company characteristics and credit risk among the Kenyan microfinance
banks. Based on the findings, the study recommended that the management of microfinance
banks should diversify their operations to reduce credit-related risks facing microfinance banks,
which is a crucial determinant that ensures increased earning capacity. The study recommends
further research on the influence of bank liquidity on the credit risk of microfinance banks in
Kenya using a longer time horizon and different methods.
Description
A Research Project Submitted to the School of Business
Economics and Tourism in Partial Fulfillment of the
Requirement for the Award of the Degree of Master of Business
Administration (Finance Option) of Kenyatta University.
Keywords
Firms’ Characteristics, Credit Risk, Microfinance Banks, Kenya