FINANCIAL SOUNDNESS INDICATORS AND FINANCIAL PERFORMANCE OF DEPOSIT TAKING MICRO FINANCE BANKS IN KENYA
Abstract
Purpose of the study: Financial performance of microfinance institutions can be regarded as critical element to the sustainability of microfinance. The structure and the financial position of a firm is the inception for their performance in matters finance. There has been increased internal and external pressure for Deposit Taking Microfinance banks to decrease dependence on subsidized or grant funding. Non-performing loans (NPL) increased while profitability levels plunged considerably with return on equity and return on asset reported declining. Therefore, Deposit Taking microfinance banks face the challenge of financial performance and sustainability. The theories include accelerator theory of investments, liquidity theory, capital asset pricing model and resource based view theory. The research set to establish the influence of financial soundness indicators on the financial performance of Deposit Taking Microfinance banks in Kenya. It specifically considered the influence of capital adequacy, asset quality, sustainability financial cover, liquidity and investment growth on the financial performance. The study utilized causal research design.
Method/methodology: The target population of the research was 13 Deposit Taking microfinance banks licensed and regulated by the CBK. The study utilized census approach owing to the small number of the licensed deposit taking microfinance banks. Secondary data of deposit taking microfinance banks licensed by CBK were obtained from audited financial publications. Panel data covering the period of 6 years from 2012 to 2017 was collected.
Results: The regression results found that capital adequacy, asset quality, liquidity, sustainability financial cover and investment growth were found to be satisfactory variables by explaining 68.43% of the variation in financial performance of deposit taking microfinance banks in Kenya. Regression of coefficients findings showed that capital adequacy is positively and significantly related with financial performance of deposit taking microfinance banks (β=0.215139, p=0.038). It was further established that asset quality has a negative and significant relationship with financial performance of deposit taking microfinance banks (β=-0.40267, p=0.009). Liquidity is positively and significantly related with financial performance of deposit taking microfinance banks (β=0.091013, p=0.000) while sustainability financial cover measured as loan delinquency has a negative and significant relationship with financial performance of Deposit Taking microfinance banks (β = -0.06328, p=0.044). The results further indicated investment growth is positively and significantly related with financial performance of microfinance institutions (β = 0.106182, p=0.005).
Conclusions and recommendations: The study concluded that capital adequacy, asset quality, liquidity, sustainability financial cover and investment growth influences financial performance of deposit taking microfinance banks. It is recommended that deposit taking microfinance banks may need to diversify investments by diversifying products offered in order to widen their income margin. Diversification of business will allow the deposit taking microfinance banks to enhance their business sustainability while contributing more to the asset value of the enterprise. It also noted that deposit taking microfinance banks need to make optimum utilization of its resources including assets to widen profitability margin and to carry out its vital tasks. Deposit Taking Microfinance banks should comply with banking rules and regulations to keep away from the increasing incidence of NPL and the regulatory authorities should regularly assess the lending behavior of the banking industry. The study further recommends that deposit taking deposit taking microfinance banks should adopt sound financial risk management practices in order to promote profitability and create wealth to their shareholders. The study made contribution to knowledge and future researches.
Keywords: Capital adequacy, asset quality, liquidity, sustainability financial cover, financial Performance, Deposit Taking Microfinance banks, Kenya
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