Effect of Exchange Rate Volatility on Financial Performance Of deposit Taking Microfinance Institutions in kenya

Abstract

Deposit- taking microfinance institutions have experienced declining financial performance despite their economic contribution. The purpose of this study was to investigate how exchange rate volatility affected the financial performance of deposit-taking microfinance organizations in Kenya. The analysis is based on the international fisher effect, purchasing power parity, and the classical theory of inflation. A study design that provides explanations was used. Fourteen (14) deposit-taking microfinance institutions formed the target population. Secondary data ranging from 2013 to 2022 was obtained from Central bank of Kenya. Data was analyzed using descriptive statistics like mean, standard deviation, minimum and maximum were employed. To ascertain the link between the study variables, regression analysis and Pearson correlation wereperformed. The findings indicated that exchange rate volatility had a negative and significant effect onfinancial performance of deposit taking microfinance institutions. Further, deposits, inflation and interest rate had insignificant effect financial performance of deposit taking microfinance institutions. The study concluded that increase in exchange rate volatility will lead to decline in financial performance of deposit taking microfinance institutions. Deposits, inflation and interest rate have negligible effect on financial performance of deposit taking microfinance institutions. The study recommended that the management of microfinance institutions should develop measures aimed at countering the negative impact of exchange rate on financial performance; should develop investment strategies that can withstand the negative effect of exchange rate volatility; and should develop deposit mobilization strategies aimed at increasing deposits from customers.