Influence of Micro Determinants on Financial Performance of Microfinance Institutions in Nairobi County, Kenya

Abstract

MFIs have a goal of accepting client’s deposit and act as financial lenders such that they operate within the laid down policy structure. This structure should be developed by highly experienced board members whose decisions influence positively the general direction of the operations. The general objective of the study was to determine the influence of micro determinants on financial performance of microfinance institutions in Nairobi County, Kenya. The specific objectives were to assess the influence of capital structure, product diversification, credit risk management and board members’ composition on financial performance of microfinance institutions in Nairobi County, Kenya. The study was guided by three theories whereby pecking order theory guided capital structure, resource-based view theory guided product diversification and composition of board members; and credit risk theory guided credit risk management variable. Notably, the study applied descriptive research design during the collection of data. The study’s target population was 14 microfinance banks registered and regulated by the CBK. Further, the respondents were 19 operations managers, 34 tellers, 40 credit officers, and 28 customer care officers. The study collected primary and secondary data whereby close-ended questionnaires and secondary data collection form was used respectively. The study conducted a pre-test study of the questionnaires in Cooperative bank and I&M banks in Nairobi County. Further, the study tested reliability through the Cronbach Alpha coefficients. Notably, the study assessed criterion, construct and face types of validity. Further, quantitative data was analyzed using SPSS software version 25 to generate descriptive and inferential statistics. The various descriptive analysis was frequencies, percentage and mean, while linear and multiple regression analysis was done as part of inferential statistics analysis. The conclusion made on capital structure was that MFIs’ management had failed to balance between raising their capital from the share capital and other forms of funding. On product diversification, the management failed to incorporate various improvement suggestions made on the different implemented products. On credit management, there were poor debt recovery methods in the branches leading to numerous default rates. On board members, they lacked a policy framework on the frequency and range of timelines when decision should be made and if they did, they did not put it into practice. The study recommends on capital structure that the MFIs’ board of management should provide a reliable policy framework on payment structure. On product diversification, the management of MFIs should commission a special committee of expert to review the requirement of each and every product being offered. On credit management, there should be a thorough audit of the ICT financial systems used by the MFI to ensure that it works seamlessly. On board members composition, there should be a clear framework developed through a consensus meeting with shareholders’ representative