The Influence of Institutional Characteristics on the Performance of Licensed Microfinance Institutions in Kenya

Abstract

One of the key objectives of micro-finance institutions is to eradicate poverty achieved through financial assistance to the economy at large with lower interest rates which provide capital and economically boost activities of low-income earners therefore eradicating poverty. However, due to the structure of the financial sector in Kenya, microfinance institutions experience stiff competition from commercial banks and electronic money transfers which lead the slow development of the microfinance institutions. The aim of this research is to investigate the influence of institutional characteristics on the financial performance of licensed micro-finance institutions in Kenya which include liquidity, operational efficiency, credit management practices and the moderating variables firm size. The study drew its understanding from residual equity theory, liquidity management theory, asymmetric information theory and Capital asset pricing model (CAPM). The study embraced descriptive research design and used secondary data obtained from annual financial statements reports of the 13 licensed micro-finance institutions in Kenya. Data was analyzed using descriptive statistics and inferential statistics. Inferential statistic was used to analyze secondary data with the help of STATA. Ethical considerations were adhered to such as acquiring authorization letter from the school and relevant bodies and treating the information with much privacy and confidentiality. The study concluded that liquidity had a significant positive influence on the financial performance of microfinance institutions therefore a critical component affecting financial performance. Operational efficiency had a significant negative influence on the financial performance of microfinance institutions. Credit management had no significant influence on financial performance of licensed microfinance institutions in Kenya, while size of the firm had a significant moderating influence on the association between institutional characteristics and financial performance of licensed microfinance institutions in Kenya. The research study recommendation was that microfinance institutions should come up with strategies and policies to improve on their liquidity position since it leads to increased financial performance and set strict guideline to maintain their credit management practices in order to reduce credit risk. Microfinance institutions should also follow the proposed budget in order to make sure that operational expenses are minimized, and operational income maximized for optimal financial performance of the organization.