Effect of Financial Technology on Financial Performance of Microfinance Institutions in Kenya

Abstract

The rapid evolution of financial technology (fintech) has significantly transformed the financial services sector globally, including microfinance institutions in Kenya. These institutions, which primarily serve low-income populations, have increasingly integrated fintech solutions to enhance their service delivery and financial performance. Despite this trend, there is limited empirical evidence on the specific impact of fintech adoption on the financial performance of MFIs in Kenya. This study sought to bridge this gap by investigating the effect of fintech on the financial performance of MFIs, measured by ROA. The study was grounded in the Technology Acceptance Model and supported by the Diffusion of Technology Theory and Financial Intermediation Theory, which provide a theoretical framework for understanding the adoption and impact of fintech innovations on financial performance.The study employed a descriptive panel research design, analyzing data from 41 licensed MFIs in Kenya over a five-year period (2019-2023). The independent variables included mobile banking, internet banking, and ATM transactions, while the control variables were asset quality (measured by the ratio of non-performing loans to total loans), liquidity (measured by the ratio of liquid assets to total assets), and firm size (measured by the natural logarithm of total assets). The data was sourced from the annual published financial reports of the MFIs, and the analysis was conducted using panel regression techniques to examine the relationships between the variables.The findings revealed that the adoption of fintech significantly influences the financial performance of MFIs in Kenya. The model’s R-squared value of 0.4217 indicates that approximately 42.17% of the variance in ROA is explained by the independent variables. Mobile banking had a significant positive effect on ROA (coefficient = 0.044, p = 0.008), suggesting that higher volumes of mobile banking transactions are associated with improved financial performance. ATM transactions also showed a significant positive impact on ROA (coefficient = 0.114, p = 0.001), reinforcing the importance of traditional banking infrastructure in the fintech landscape. Conversely, asset quality had a significant negative effect on ROA (coefficient = -0.165, p = 0.008), indicating that higher levels of non-performing loans adversely affect financial performance. While internet banking and liquidity were positively correlated with ROA, their effects were not statistically significant (p = 0.232 and p = 0.217, respectively). Firm size had a significant positive impact on ROA (coefficient = 0.093, p = 0.001), highlighting the advantages of scale in enhancing financial performance.The study concludes that fintech, particularly mobile banking and ATM transactions, plays a crucial role in enhancing the financial performance of MFIs in Kenya. Asset quality management is also critical, as poor asset quality significantly detracts from profitability. The findings underscore the need for MFI management to prioritize fintech adoption and asset quality management as strategic initiatives. Policymakers should create an enabling environment for fintech integration and support initiatives that enhance credit risk management practices.Future research could explore the impact of a broader range of fintech innovations, conduct comparative studies across different regions, and adopt mixed-methods approaches to gain deeper insights into the fintech-performance relationship