The Effect of Financial Innovation on Financial Returns of Deposit Taking Microfinance Institutions in Kenya

Abstract

The role of microfinance institutions cannot be understated in enhancing credit access to the poor and rural population in Kenya just like in the other developing countries. Indeed microfinance has been perceived as a crucial driving mechanism towards achieving the millennium development target of halving extreme poverty and hunger by 2015. However, despite the importance of the sector in achieving vision 2030 in Kenya, the sector is been faced by the sustainability questions as a result of continued negative returns generated by mostly the deposit taking microfinance (DTM). Some of the key reasons behind the negative DTM financial returns is the competition from commercial banks and the increasing number of MFI as growth of some of MFI to leading banks in Kenya (like Equity Bank) has proved the potential of the sector that had always been taken to be not bankable. Guided by this knowledge, the study sought to determine the effect of financial innovation on deposit taking microfinance institutions financial returns. The study adopted a descriptive study design and applied multiple regression analysis to analyze 2009 to 2013 data obtained. The study found that financial innovation has positive effect on profitability of deposit taking microfinance institutions with investment in research and development also having positive effect on financial returns of deposit taking microfinance institutions. The study also found that financial performance of DTMs remained poor with main reasons being quoted as much regulation from the central bank of Kenya, competition from other financial institutions and poor macroeconomic environment. Study recommends that DTMs need to invest more on research and development so as to come up with more better and customer oriented financial products and services which will go a long way in boosting DTMs financial returns.