An Evaluation of the effect of prudential regulations on the social and financial performance of Microfinance Banks in Kenya
Date
2022
Authors
Madialo, Lawrence Odero
Journal Title
Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Appropriate regulation and supervision of microfinance is of critical importance in bringing the poor and vulnerable communities the financial services they need. However, pertinent concerns arise on how best to regulate and supervise this industry given its various specificities and broader social mission. Statistics show that most Microfinance Banks (MFBs) in Kenya have incurred losses since the licensing of the first institution in 2009 by the Central Bank. This study attempts to examine the effect of prudential regulations on social and financial performance of MFBs in Kenya. The study focuses on capital regulations, liquidity regulations, loan loss provisioning requirements and their effect on social and financial performance of MFBs in Kenya. This study is anchored on the microfinance schism and the public interest theory of regulation. To achieve the study’s objectives, a descriptive research design is employed and the population comprises the 13 deposit taking microfinance institutions in Kenya as at 31st December 2020. The study uses unbalanced panel secondary data which was gathered through a data collection sheet for a period of seven years from 2014 to 2020. Data analyses were undertaken through descriptive and inferential statistics using the STATA statistical software. Inferential statistics entailed correlation analysis and the panel data regression analysis. With respect to financial performance, the study findings revealed that loan loss provisioning had a negative and significant effect on ROA, Capital adequacy had positive and significant effect on ROA and liquidity had a negative relationship with ROA. Bank size had a positive and significant effect on ROA while bank age had a positive effect on ROA though not statistically significant. With respect to social performance, the study findings revealed that Capital adequacy had a positive relationship with outreach, Liquidity had a positive and insignificant effect on outreach while LLP had a negative effect on outreach. Bank size had a negative and insignificant effect on outreach as Bank age had a positive and significant effect on outreach. Thus, to improve financial performance of the microfinance institutions considering their socio-economic importance, the management need to limit levels of non-performing loans that subsequently necessitates the loan loss provisions. Capital adequacy should be equally enhanced with regulatory requirements to enhance performance. Since size negatively affects outreach which is a social performance indicator, bigger MFIs should be encouraged to enhance their outreach initiatives as they take advantage of economies of scale. The levels of liquidity of the MFIs should also be improved to enhance outreach and subsequently accessibility.
Description
A Research dissertation submitted to the Strathmore University Business School in partial fulfillment for the Master of Science in Development Finance of Strathmore University
Keywords
Prudential regulations, Social and financial performance, Microfinance Banks_Kenya