Firm Characteristics and Non-Performing Loans of Microfinance Banks in Kenya

Abstract

Microfinance banks in Kenya have continued to experience challenges of loan defaults which negatively impact their asset quality and performance. As a result of loan default, many of these institutions have suffered significant losses. The goal of this study was to see how firm factors affect non-performing loans at Kenyan microfinance institutions. The specific objectives were to examine the impact of leverage, business size, liquidity, and capital sufficiency on non-performing loans. Institutional theory, credit crunch theory, and liquidity preference theory served as the research's guide. The research design was descriptive. The analysis was premised on descriptive and inferential analyses. The findings showed that leverage significantly and favorably affected non-performing loans. Non-performing loans were negatively and significantly impacted by firm size. Microfinance banks' non-performing loans were not significantly affected by liquidity or capital adequacy. The study's conclusions suggest that lowering the debt ratio of microfinance banks will undoubtedly lead to a reduction in non-performing loans. By expanding the asset base, there is a greater chance that the non-performing loans of the microfinance banks will be reduced. Increasing liquidity and capital adequacy would not have a substantial impact on the non-performing loans of microfinance banks. The management of the microfinance banks should review the debt policies with aim of reducing over-reliance on debts, should strengthen the equity policy that will lead to low leverage, should develop strategic plans aimed at strengthening and growing the asset base. The management should particularly channel most of the payoffs from investment in asset acquisition. Policymakers in the financial sector especially CBK should streamline policy implementation toward loan defaulters. Academicians and researchers should review the empirical findings of this study in building their research work on related topics.