Effects of Macroeconomic Factors on the Financial Performance of Deposit Taking Micro-finance Institutions in Kenya

Abstract

Kenya, like any other developing country is being faced by numerous challenges among them high poverty levels, illiteracy and lack of proper policies to curb these many challenges. In fact, majority of the household in Kenya live below poverty line and dwell in slums where they face serious challenges. One of the key industries in the Kenyan economy and all other economies in developing countries is the microfinance sector which has recently attracted a lot of attention. The world today is also becoming a global village with the advancement in technology and liberalization. As a result, macroeconomic variables in the country have been so flexible as compared to some years back. These unpredictable changes in the macroeconomic variables and the reducing returns being earned by the micro finance institutions (MFI) were the main driver for this study whereby it sought to find out the effect of these macro-economic variables on micro finance returns. To achieve the objective of the study, the deposit taking micro finances in Kenya were used. It was found that MFI financial performance could be determined to a very large extent by three macro-economic variables, namely economic growth (measured by GDP), interest rates and inflation. It was found that increase in GDP led to increased MFI performance as measured by return on assets (ROA), increase in interest and rates led to reduce ROA. The numbers of years the MFIs have been operating were also found to positively affect MFIs ROA where MFIs in operation for long were having consistently high ROA. This revelation gives regulators vital information and if they want to boost micro finance industry, they should check on the three macro-economic variables which will instead lead to high employment levels and lead to increased living standards.