The effects of liquidity on financial performance of deposit taking micro finance institutions in Kenya

Abstract

Liquidity is a concept that many investors fail to take into account or understand and as a result their financial plans fail to come through in such critical times as retirement or college funding for a dependent. However, the fact is liquidity or a lack thereof causes more financial problems than almost any other aspect of finance .With the introduction of the CBK Micro finance act (2008) which saw most Microfinance institutions acquire licenses to start taking deposits from members hence more growth and commercialization of MFIs and the need to become fully independent institutions. The management and formulation of policies in liquidity becomes relevant. In this study, an attempt has been made to fill in the existing knowledge gap by determining effects of liquidity on the financial performance of Deposit Taking Micro Finance institutions in Kenya. This study analyzed the liquidity and financial performance of Deposit taking microfinance institutions in Kenya for the period 2009 to 2013. For the purpose of this study, the data was extracted from the published institution’s annual audit reports, Association of Micro Finance Institutions Reports (AMFI) and CBK’s banks supervision annual reports for the five years under examination. This study used inferential statistics to explain the main features of a collection of data in quantitative terms while correlation and linear regression analysis are used for analyzing the data. Financial performance was measured using return on assets while liquidity of DTMFIs was measured by cash and cash equivalents divided by total average assets. The results revealed that there is a positive relationship between liquidity and financial performance as the coefficient of determination was found to be .910 explaining that the liquidity explains 91% of the variance in the financial performance. The correlation revealed a significant association of .941 at 5% level of significant. The study concluded that efforts to stimulate the MFIs’ liquidity would see the micro financial sector realize increased financial performance which would result to increased efficiency in the sector’s operations. Recommendations made include; strategies to facilitate increased liquidity of MFIs to be adopted, emphasize on asset growth as a stimulator of financial performance and competitiveness as well as improvements in operational efficiency through application of modern technology and innovative operational strategies.