Abstract
Deposit taking microfinance banks plays a major role in boosting the economy of a country, improving the standard of living of people and alleviating poverty more especially in developing countries. The study sought to determine the influence of credit risk on financial performance of deposit taking microfinance banks in Kenya. The independent variable in this study was credit risk proxied by Capital to risk weighted assets and non-Performing loan ratio while dependent variable was financial performance measured by return on equity. The study adopted Panel data regression using ordinary Least Squares (OLS) methods/ design. The target population of the study was 13 deposit taking microfinance banks regularized and licensed by Central Bank of Kenya (CBK) by 2017. However due to insufficient data (information) 4 Deposit taking microfinance banks were removed. The study analyzed 9 Banks s for the period of 7 years (2011 to 2017). Secondary data was used in order to capture the relationship between credit risk and performance of deposit taking microfinance banks in Kenya. The data was analyzed using Descriptive statistics, correlation analysis and panel regression analysis. Statistical software’s Eview version 8 was used to estimate the relationship between the study variables. The autocorrelation among the regression model was tested using Durbin-Watson factors. The augmented Dickey Fuller (ADF) unit root test was used with the null hypothesis for acceptance (non-stationarity) or rejection (stationality). Regression result indicated that credit risk had a positive and statistically significant effect on financial performance of deposit taking microfinance banks in Kenya. The study recommends that further studies should be conducted to determine the effect of credit on financial performance of deposit taking microfinance banks using more credit variables and longer time of period, in addition there is need to analyze the influence of credit risk on other financial institutions like SACCOs and commercial banks. Furthermore, researches on other risks which include, market risk, interest rate risk, liquidity risk, strategic, Compliance and legal needs to be investigated since they are not included in the study.
Highlights
The concept of Microfinance banks in Kenya is believed to be a big boost to the poor people and is one of the developed in the sub-Saharan Africa
The independent variable in this study was credit risk proxied by Capital to risk weighted assets and non-Performing loan ratio while dependent variable was financial performance measured by return on equity
The study recommends that further studies should be conducted to determine the effect of credit on financial performance of deposit taking microfinance banks using more credit variables and longer time of period, in addition there is need to analyze the influence of credit risk on other financial institutions like SACCOs and commercial banks
Summary
Background The concept of Microfinance banks in Kenya is believed to be a big boost to the poor people and is one of the developed in the sub-Saharan Africa. The microfinance banks profit before tax decreased by 169 percent from Ksh 549 million for the period ended December 2015 to a loss of Kshs.377 million for the period ended December 2016. Overall decline performance with a combined loss before tax of 622 million for the year ending 31 December 2017 was reported by the central bank of Kenya (CBK, 2017). This was as a result of the registered loss of Kshs 377 reported by the microfinance sector. Past empirical studied have been carried out in relation to credit risk and financial performance of deposit taking microfinance banks/ or firms.
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