Effect of Financial Inclusion on Performance of Microfinance Banks in Kenya

Abstract

Financial inclusion brings closer financial services at affordable costs to sections of disadvantaged and low-income segments of society. There have been many formidable challenges in financial inclusion such challenges include; bridging the gap between the sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms so as to promote financial economic growth. A nation can grow economically and socially if its weaker section can turn out to be financially independent. Kenya strives to become a regional financial hub with vibrant, efficient and globally competitive financial system to drive savings and investments by the year 2030, where financial inclusion has been identified as a key driver. However, there is paucity of information on the contribution of financial inclusion on performance of micro finance banks in Kenya. It is on this basis that the study sought to determine the effect of financial inclusion on financial performance of micro finance banks in Kenya. The study was guided by Expectations Theory, Contracting Cost Theory and Market Hypothesis Theory. A census study was carried out for all the twelve (12) microfinance banks in Kenya. The study relied on secondary data covering the period 2015-2019 and this was obtained from audited financial statements of the microfinance banks. Correlational research design was adopted. Random and Fixed effects panel data models were estimated to establish the relationships. Choice of the best model between the two was done using the Hausman test where random effect was selected. Post estimation tests including multicollinearity, autocorrelation and heteroscekedastity work conducted. An insignificant negative relationship was established between firm size and return on assets (Coef= -.0014368, p >0.05). Similarly, the study established insignificant negative relationship between interest rates and financial performance as measured by return on asset p >0.05). However, there was a significant positive relationship between operational efficiency and return on asset as a measure of financial performance (Coef= .394119, p <0.05). The study concluded that operational efficiency affected financial performance of micro finance banks in Kenya hence recommended that microfinance institutions should leverage on operational efficiency in order to make profit for shareholders.

Non-Financial Variables Determining Performance Village Credit Institutions

“…It is shown that access to third party funds can improve performance which is reflected in the growth of credit volume, profit growth, asset growth and customer growth. The findings of this study reinforce previous findings which found that financial inclusion was found to be able to improve performance (Oranga & Ondabu, 2018, financial inclusion had a positive effect on performance (Issaias et al, 2021;History et al, 2020;Sanistasya et al , 2019).…”

“…'The Financial Inclusion Program provides opportunities for accessing credit and savings safely, and can avoid dependence on economically disadvantaged communities from informal credit sources that have high risks such as moneylenders (Sarma, 2010). Financial inclusion was found to be able to improve performance (Bongomin et al, 2017), (Oranga & Ondabu , 2018), and financial inclusion has found a positive effect on performance (Sanistas yes et al, 2019;History et al, 2020;Issaias et al, 2021), Based on this, the hypothesis is formulated as follows, H4: Financial inclusion has a positive effect on sustainable performance.…”

Strategic positioning and is it a useful construct in improving performance of microfinance institutions in Kenya

“…Although micro-financing is crucial for strengthening the poor's capacity, it is still challenged by the problem of inaccessibility among the people who need it in Kenya. While micro-finance institutions operate deposit, lending, and insurance activities they have not managed to exhaust the need for all SMEs in Kenya (Issaias et al, 2021). In addition to the problem of in exhaustive capacity to meet the needs of SMEs in Kenya, microfinance institutions have witnessed a drop in their performance over the years (Muithya et al, 2020;Kahihu et al, 2021).…”