Effect of Insider Loans and Advances on Financial Performance of Microfinance Banks in Kenya

Abstract

The study focused on the impact of insider advances and loans on the financial performance of Kenyan microfinance banks. A longitudinal descriptive survey design was employed in the study. It focused on all microfinance banks in Kenya, totaling to 14 by CBK Annual Report as of December 31, 2022. The study used secondary data, collected from Bank Supervision Annual Reports and AMFI Sector Reports for the study period. The R-value of 0.724 indicates there is a strong positive correlation between insider loans and advances and financial performance of Kenya's microfinance banks. The study found that insider loans and advances explained 52.5% of Kenyan microfinance bank financial performance differences. Total insider loans and advances, MFB size, operational efficiency, gross non-performing loans, and capital sufficiency therefore reliably predicted Kenyan microfinance bank financial performance. The study concluded that total assets, insider loans and advances, and gross non-performing loans significantly affect financial performance given β=.040, p<.05; β=-1.970, p<.05 and β=-.159, p<.05 respectively. Capital adequacy ratio and operating efficiency do not however have significant effect on financial performance given β=.011, p>.05 and β=- .198, p>.05 respectively. Since the study found that total assets, insider loans and advances, and gross non-performing loans significantly affect MFB financial performance in Kenya, MFB management should reduce non-performing loans and follow strict insider loan and advance rules. The fact that gross non-performing loans have a significant negative association with net income means that MFBs should effectively control their credit risk, by implementing tight credit policies in addition to sophisticated credit risk management frameworks.