The Relationship between digital financial strategies and financial performance of microfinance banks in Kenya
Date
2024
Authors
Ondago, W. M.
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Journal ISSN
Volume Title
Publisher
Strathmore University
Abstract
Microfinance banks (MFBs) in Kenya play a significant intermediary role and financial inclusion of the unbanked. Despite substantial investments in technological tools and the integration of digital channels, MFBs in Kenya have experienced mixed financial performance over the last five years. This study addresses this discrepancy by investigating the relationship of digital financial strategies and financial performance. The specific objectives were to determine the effects of bank characteristics and use of digital financial strategies, to assess the perceptions of MFBs on the role of digital financial strategies on financial performance and to establish the association of digital financial strategies and financial performance of microfinance banks. Drawing upon Dynamic Capabilities Theory, Financial Intermediation Theory, and Financial Innovation Theory, this research employs a positivist philosophical approach and a mixed research design. The target population encompasses all 14 operational microfinance banks as of December 31, 2022. Both primary and secondary data were gathered, with secondary data sourced from Annual Bank Supervision Reports and audited financial statements from 2018 to 2022. Primary data was collected through structured questionnaires distributed to employees in the Finance and ICT departments of the 14 targeted microfinance banks. Data analysis involved both descriptive analysis and inferential statistics, including OLS regression analysis to generate research findings. The study results indicate that both mobile and internet banking significantly enhances the financial performance of MFBs. However, respondents identify regulatory and supervisory challenges, legacy infrastructure constraints, budgetary limitations, and difficulties in meeting rapidly evolving consumer demands as significant obstacles to the effective implementation of digital financial strategies. In conclusion, this study establishes that total assets, earnings, and credit risk of a bank exert a positive and significant influence on the adoption of digital financial strategies in MFBs in Kenya. Additionally, mobile banking, in terms of transaction value, exhibits a positive relationship with the financial performance of MFBs. The study recommends increased regulatory support from the Central Bank of Kenya and emphasizes the need for MFBs' top management to allocate more resources towards strategies that enhance the adoption and use of digital financial services. The findings of this study hold relevance for MFBs' management, policymakers, regulators, bank customers, as well as researchers and academicians alike.
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Citation
Ondago, W. M. (2024). The Relationship between digital financial strategies and financial performance of microfinance banks in Kenya [Strathmore University]. http://hdl.handle.net/11071/15585