Firm Characteristics and Financial Performance of Licensed Microfinance Banks in Kenya
Abstract
Microfinance institutions significantly contribute to the financial sector by providing credit facilities to low-income earners and the unbanked population. However, the rising economic crisis in Kenya has adversely affected the financial performance of Microfinance institutions, raising concerns about their sustainability. This study aims to investigate how firm characteristics such as capital adequacy, bank size, and management efficiency impact the financial health of microfinance banks in Kenya. The research spans a six-year period from 2018 to 2023, a time marked by rapid expansion in the microfinance sector and significant economic challenges, including the devaluation of the Kenyan shilling, corporate consolidation, and the takeover of financial institutions. The theoretical framework of the study is underpinned by Capital Buffer Theory, Economic Theory, Efficiency Structure Theory, and Performance Management Theory. A descriptive research design was employed, collected secondary data from the published financial reports of the 13 licensed microfinance banks in Kenya, using a census sampling method. Ethical and logistical standards were rigorously followed, ensuring voluntary participation and maintaining data confidentiality. Results revealed a strong positive correlation between capital adequacy and financial performance, indicating that well-capitalized microfinance banks tend to perform better financially. Management efficiency also showed a significant positive correlation with financial performance, while bank size showed a weaker relationship. Panel regression further confirmed that capital adequacy and management efficiency had a positive impact on financial performance, whereas bank size had a minimal effect. Conclusions from the study indicate that firm characteristics significantly influence financial performance. Larger banks due to economies of scale and diversified portfolios, tend to perform better, implying that growth and expansion strategies can enhance financial stability. Capital adequacy emerged as a crucial determinant of financial health, with well-capitalized banks being more resilient to financial shocks and better positioned for growth. Management efficiency also played a key role, with better-managed institutions showing higher profitability through cost control and optimal resource allocation. These insights can guide policymakers and bank managers in crafting strategies to bolster the financial resilience of Microfinance institutions, with an emphasis on maintaining robust capital adequacy ratios and enhancing managerial capabilities to drive long-term sustainability and competitiveness.
Keywords: Bank Size, Capital Adequacy, Management Efficiency, Financial Performance
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