The Effect of Change in Base Lending Rate on Growth of Micro-finance Banks in Kenya

Abstract

For the past few years, central bank of Kenya through the monetary committee has actively changed base lending rate from time to time. This has mostly been attributed by inflation and exchange rate. Subsequently the no of microfinance bank have risen from one in year 2009 to twelve by 31st may 2015. The objective of this study was to find out whether there exists a relationship between change in base lending rate and the growth of microfinance banks in Kenya. The study involved collecting and analyzing secondary data from Central Bank of Kenya, individual microfinance banks and the Association of Microfinance Institutions in Kenya. Purposive sampling was used to select nine microfinance banks that were used in the study. The reference period was from 2010-2014. Ordinary least squares regression model was used in this study where testing was done at α=0.05 level of significance. The study showed that there is a statistically significant negative relationship between both based lending rate and management efficiency and microfinance institutions growth. On the contrary, the study showed that there is statically significant positive relationship between credit terms and growth of microfinance banks. The study recommends that individual MFIs should endeavor to vary their loan products so as increase their gross loan portfolio by attracting more borrowers even when CBK lending rates are high. The fact that data was collected from existing data bases may bias the study findings and thus the results of this study cannot be generalized to other commercial banks or other MFIs in other parts of the world. Future studies could employ primary data in carrying out a similar study for comparison purposes. There is also need to conduct other studies on credit lending MFIs and Sacco‟s to check whether the base lending rates have similar effects on their growth