Firm Characteristics and Liquidity of Microfinance Banks in Kenya
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Date
2023
Authors
Kiio, Joseph Munyao
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
The dynamism of the microfinance sector has benefited microfinance banks, resulting in
significant transformation in the number of users served as well as the diversity of products
and services offered. However, numerous microfinance banks have ended up with a
liquidity ratio that is much lower than the required limit. Consequently, MFB deposits are
dwindling, loan books are reducing, and profits are declining, all of which have an impact
on MFBs' intermediation role. Thus, the main objective of this research was to examine
how the characteristics of microfinance banks in Kenya influence their liquidity. In
particular, the study aimed to investigate the impact of microfinance bank size,
management effectiveness, capital adequacy and asset quality on the liquidity of these
institutions. Additionally, the study aimed to determine whether bank competitiveness
moderates the relationship between firm characteristics and liquidity in microfinance banks
in Kenya. The Efficient Structure Theory, Capital Buffer Theory, Market Power Theory
and Preference theory of Liquidity informed the study. The study adopted a positivism
philosophy and Causal research design. The study's target population was the 13
Microfinance Banks in Kenya that were active between 2012 and 2018. This research used
a census method, focusing on all 13 MFBs in Kenya. Secondary data from Central Bank
supervisory reports and published financial statements were used in the study. Using Stata
software version 14, data was analyzed using descriptive analysis and panel regression
analysis. The hypotheses were tested at the 0.05 level of significance. The study findings
indicate that microfinance bank size had a negative and significant effect on liquidity.
Microfinance management efficiency had positive and insignificant effect on liquidity.
Capital adequacy was found to have a negative and significant effect on liquidity while
Asset quality had a positive and significant effect on liquidity of microfinance banks in
Kenya. The finding further indicated that Bank Competitiveness had a significant
moderating effect on microfinance bank size and liquidity. Bank competitiveness did not
have a significant moderating effect on management efficiency, asset quality, capital
adequacy and liquidity of microfinance banks in Kenya. The study found that some of the
firm characteristics have a significant effect while others had insignificant effect.
Consequently, the study recommends that microfinance bank managers can effectively
manage liquidity by collectively focusing on bank size and take note of all changes that
may influence the liquidity levels of the banks. This will let managers of microfinance
banks fully anticipate changes or fluctuations in total assets, which may have an impact on
these banks' liquidity and carefully monitoring changes in their assets, microfinance bank
managers can anticipate potential liquidity issues and take proactive steps to mitigate them,
such as selling off assets. Expanding investment opportunities can also help to protect
microfinance banks from fluctuations in liquidity by diversifying their asset base. Policy
makers and regulators should implement policies to ensure that microfinance banks
maintain adequate levels of capital to support their operations. Microfinance bank
managers must carefully balance the demand for loans with the need to maintain highquality loan portfolios that do not result in excessive losses. Overall, effective monitoring
mechanisms and appropriate interest rate policies are essential for protecting the interests
of clients and ensuring the stability and sustainability of the microfinance-banking sector
in Kenya.
Description
A Thesis Submitted to the School of Business, Economics and Tourism in Partial Fulfillment of the Requirements for the Award of Degree of Doctor of Philosophy in Business Administration (Finance) of Kenyatta University, April 2023.
Keywords
Firm Resources, Performance, Deposit Taking Savings, Credit Co-Operative Societies, Nairobi City County, Kenya