The Effect of Product Diversification on the Financial Performance of Micro Finance Companies in Kenya

Abstract

The main objectives of this study were to identify the types of diversification in the Kenyan microfinance market and how they relate to performance and to establish the effect of non interest based diversification on the financial performance of MFI‟s. These non interest based services include money transfer, saving products , deposit taking and micro insuarance. The study adopted a descriptive survey design and relied on secondary data collected from the financial statements, news bulletins and websites of Central Bank of Kenya (CBK) and Deposit Taking Microfinance Institutions. The collected data was cleaned and coded before being analyzed by use of the Statistical Package for Social Sciences (SPSS). The data analysis techniques included descriptive statistics like the mean, minimum, maximum and standard deviation. In addition, inferential statistics like correlation analysis and regression analysis were also used to establish relationships between the dependent and independent variables. The findings were presented in tables and graphs. Major research findings indicated that the diversification indicator, Return on Assets (R.O.A) indicator and Return on Equity (R.O.E) indicator were on a growth pace from 2008 to 2012. In addition, the findings indicated that diversification of products and services at the DTMs explained 62.11% on the financial performance of the DTMS. However, only the ROA had a significant correlation at a level of significance of 0.01. The main conclusion was that the diversification of products was an appropriate strategy to increase the profit potential of DTMs. The researcher recommends improvement of the product adoption and innovation policies to increase product diversification and hence assure the DTMs of increased earnings. There is also need for the DTMs to recruit product managers with specific product portfolios in order to ensure they are responsible and continually drive the innovation agenda of the DTMs. The researcher suggests that a similar study be carried out targeting all the MFIs in Kenya with an aim of establishing the effect of product differentiation on the profitability of the MFIs. This will inform the strategy of the MFIs and strengthen their role in the economic development of the country.