Firm Characteristics and Credit Performance of Microfinance Banks in Kenya
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Date
2023-10
Authors
Kimotho, George Heho
Journal Title
Journal ISSN
Volume Title
Publisher
Kenyatta University
Abstract
Microfinance banks play a crucial role in providing financial services to low-income individuals and marginalized communities. However, these institutions face a significant challenge: ensuring the reliability of credit performance. The primary concern for microfinance banks revolves around the creditworthiness of their clients. Serving individuals with limited financial resources and no collateral presents a higher risk of loan defaults. These clients often have low credit scores or no formal credit history, making it difficult to accurately assess their ability to repay loans. The inherent risks associated with the operational environment of microfinance banks further intensify concerns about credit performance. These institutions operate in economies marked by various economic, social, and political uncertainties. Unforeseen events such as economic recessions, natural disasters, or changes in government policies can hinder borrowers' ability to meet loan obligations, increasing credit risk for microfinance banks. Deficiencies in the loan origination, disbursement, and repayment processes lead to delays, inaccuracies, and a higher level of credit risk. Regulatory compliance plays a crucial role in the realm of credit performance for microfinance banks. These entities are subject to regulatory frameworks and prudential standards designed to protect credit performance and clients. The aim of this study was to assess the impact of firm characteristics on the credit performance of microfinance banks in Kenya. The study had four objectives: to investigate the effect of management efficiency, capital adequacy, liquidity, and asset quality on the credit performance of Microfinance Banks in Kenya. The theoretical framework of the study was based on efficiency structure theory, theory of buffer capital, liquidity shift ability theory, information asymmetry theory, and credit risk theory. These theories formed the foundation for the hypothetical connections explored in the study. A causal research strategy was employed to determine the causal-effect relationship between firm characteristics and credit performance in microfinance banks in Kenya. The target population for this study consisted of thirteen licensed and operational Microfinance Banks in Kenya for the period from 2018 to 2021. The study adopted a census method to select the sample. Time series data for the years between 2018 to 2021 and cross-sectional data were collected from these Microfinance Banks. Information on Management Efficiency, Capital Adequacy, Liquidity, and Asset quality was obtained from the banks' published annual financial reports. The null hypotheses of the research study were tested using regression analysis with a significance threshold of 0.05. Relevant diagnostic tests for panel regression analyses, such as multicollinearity, autocorrelation, stationarity, heteroscedasticity, normality, and model specification tests, were performed. Ethical considerations guided the research process, ensuring that the study was conducted with integrity and adherence to ethical principles. The correlation analysis revealed that capital sufficiency and managerial efficiency showed a moderately significant correlation with credit performance. Liquidity exhibited a strong positive correlation, while management efficiency had a noticeable negative correlation. The study also found that microfinance banks with higher loan portfolios relative to their capital demonstrated better credit performance ratios, while those with excessive cash holdings had lower credit performance ratios. In conclusion, the study recommends that management should prioritize capital adequacy, liquidity, and asset quality in the management of credit for microfinance banks in Kenya. Additionally, it encourages future research to explore conceptual and contextual areas not covered in this study.
Description
Research Project Submitted to Kenyatta University School of Business, Economics and Tourism in Partial Completion of the Requirements for the Award of the Degree of Master of Business Administration (Finance Option), October 2023.
Keywords
Firm Characteristics, Credit Performance, Microfinance Banks, Kenya