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

Abstract

This study investigated 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 statistic. Inferential statistic was used to analyze secondary data with the help of STATA. 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.