The effect of lending interest rates on financial performance of deposit taking micro finance institutions in Kenya.

Abstract

Over the last five years, the country has witnessed a tremendous increase in the number of the Deposit Taking Microfinance Institutions. The objective of this study was to find out whether there exists a relationship between lending interest rates and the financial performance of Deposit Taking Microfinance Institutions in Kenya. The study involved collecting secondary data from Central Bank of Kenya, individual Deposit Taking Microfinance Institutions and the Association of Microfinance Institutions in Kenya. Consequently data for nine DTMs was analyzed for five years (2009-2013) using multivariate regression model. The study found out that a strong relationship exists between lending interest rates and financial performance of DTMs. To test the significance of the findings, analysis of variance (ANOVA) was done. The research recommends that DTMs should judiciously manage their interest rate to improve their financial performance since it has a positive effect on their financial performance and also recommends for income source diversification.