The impact of deposit taking on financial performance of micro-finance institutions in Kenya

Abstract

The Microfinance Act of 2006 that was enacted on 2nd May 2008 paved way for the transformation of Microfinance Institutions (MFIs) to deposit taking Microfinance Institutions (DTMs) in Kenya. This research project is aimed at determining whether this transformation, and in essence, the adoption of deposit taking has had an impact on the financial performance of nation-wide Microfinance Institutions in Kenya. The study has used secondary data of all the nation-wide MFIs that have adopted deposit taking in Kenya. In particular, the study used the financial statements of these nation-wide MFIs. ROA pre and post adoption of deposit taking was computed. The pre adoption ROA was then projected over the entire period that the MFIs had been taking deposits. The projected ROA was then compared with the post adoption ROA using paired t test at a significance level of 0.05. The results of the study generally suggest that deposit taking has had a negative impact on the financial performance of MFIs. This is because a general analysis of the trend in financial performance for two out of the three DTMs studied exhibited negative results. Further, the results of the paired t test confirmed that deposit taking has had a negative impact on the financial performance of nation-wide MFIs in Kenya. This is mainly attributed to the huge transformational costs that the MFIs incur during the transition period. However, experience from other countries such as Uganda suggests that with time, DTMs register positive financial results. The study therefore recommends that further studies should be carried out in future when the DTMs have been in existence for a longer period.