Relationship Between Investment Decisions and Financial Stability of Microfinance Banks in Kenya

Abstract

Microfinance institutions are financial institutions that originated with the need to target the poor and marginalized groups in the society. In Kenya, there are two categories of microfinance institutions, the credit only and those that are specifically regulated by the CBK. This study will focus on the MFIs that are regulated by Central bank of Kenya, which are currently facing a key challenge of fluctuations in the overall ROE reported as an industry average. For instance, in the 2022 and 2023, the industry average ROE stood at -.0212 and -0.0103 respectively (. This negative trend in ROE of the said microfinance institutions in Kenya is an indication that they financial stability is a great challenge which calls for the need of the proposed study. Against this background, the present inquiry was set out to predict the link between investment decisions and financial stability with emphasis on Kenya’s microfinance institutions. Financial intermediation theory and prospect theory underpinned the study: This study adopted explanatory design targeting 12 microfinance banks that are regulated by CBK in Kenya and census was used. Information in its auxiliary form was gathered with aid of data gathering sheet on a period 2019-2023. Its processing was done descriptively and inferentially. It was established that investment decisions are significant predictors of financial stability. On overall, 71.4% change in financial stability can be explained by the investment decisions. It was recommended that CBK in Kenya should review the existing policies and regulations guiding investment activities of institutions like MFIs. This will provide an opportunity to optimize the revenues generated and thus achieving financial stability. This will also have significant bearing on the growth of Kenyan economy. The managers working among MFIs in Kenya need to align the formulated strategic goals of their institutions with investment decisions as a way of maximizing the wealth of their owners. Results from the study would be useful to managers and policy makers working with microfinance banks and the Central Bank of Kenya in general.