Effect of financial regulation on financial performance of deposit-taking microfinance institutions in Kenya

Abstract

This paper looked at the effect of financial regulation on financial performance of deposit taking microfinance institutions (DTMs) in Kenya. It tried to determine whether benefits of financial regulation outweighed costs and if this would make a case for non-deposit taking microfinance regulation in Kenya. The research design that was used in this study was both cross sectional and descriptive survey method aimed at establishing the effect of financial regulation on financial performance of deposit taking microfinance institutions. The target population in this study was the 6 deposit-taking microfinance institutions in Kenya. The study collected both primary and secondary data. The primary data was collected using semi-structured questionnaires and the secondary data was collected from the financial statements of the DTMs for the period 2005-2011. Data was analyzed using Statistical Package for Social Sciences (SPSS) program and presented using tables and pie charts to give a clear picture of the research findings at a glance. The study concludes that the supportive Deposit Taking Microfinance Regulations of 2008 led to the improvement in financial performance of DTMs. The regulations lead to increase in the value of loans outstanding, total assets of DTMs, the profit and shareholders’ equity of DTMs. However, the DTMs encounter challenges such as high costs of transformation, high costs of operation, licensing costs and stiff competition from other financial institutions. The study recommends comprehensive impact analyses prior to implementation of new regulations in the financial sector particularly micro finance institutions; a long-term view when structuring regulatory framework to provide DTMs a vi clear view of the thresholds to attain on the path to institutional development and transformation. The study also recommends further research on ways in which financial performance of DTMs can be enhanced through regulatory framework