Effect of Asset Management Strategies On Financial Performance of Microfinance Banks In Nairobi County

Abstract

Microfinance banks play a pivotal role in advancing financial inclusion and supporting economic empowerment, especially among underserved populations. Despite their significance, many microfinance banks in Kenya continue to face financial sustainability challenges arising from weak asset management practices, poor liquidity controls, and deteriorating asset quality. These issues threaten profitability, increase non-performing loans, and undermine investor confidence. This study therefore sought to examine the effect of asset management strategies on the financial performance of Microfinance Banks in Nairobi County, Kenya. The specific focus areas were asset-liability management, portfolio diversification, liquidity management, and asset quality monitoring, guided by the Liquidity Preference Theory, Modern Portfolio Theory, Trade-Off Theory, and Information Asymmetry Theory. A descriptive correlational research design was adopted, targeting senior managers, financial analysts, credit officers, and internal audit personnel drawn from large, medium, and small MFBs in Nairobi County. Primary data were collected using structured questionnaires, while secondary data were obtained from published financial reports. Stratified random sampling ensured proportional representation across the MFB categories. Both descriptive and inferential statistics were analysed using SPSS version 29. The findings revealed a strong positive and statistically significant relationship between asset management strategies and financial performance. Asset-liability management was found to enhance financial stability and profitability through better risk alignment. Portfolio diversification reduced credit exposure and improved returns, while effective liquidity management ensured operational efficiency and solvency. Additionally, asset quality monitoring led to lower default rates and stronger loan portfolio performance. In conclusion, the study established that the adoption of robust asset management strategies significantly improves the financial performance of microfinance banks. It recommends that MFBs invest in advanced data analytics and technology-driven monitoring systems to enhance decision-making, risk assessment, and liquidity management. Regulators and policymakers should strengthen the institutional framework governing asset management to promote sustainable growth in the microfinance sector. Future studies could explore the moderating influence of macroeconomic factors and technological innovations such as artificial intelligence and blockchain on the relationship between asset management and financial performance.