Liquidity Management Practices and Financial Performance of Microfinance Banks in Nairobi City County, Kenya

Abstract

Microfinance banks are financial institutions that provide loans, insurance, saving platforms and other financial products to various individuals. Thus, these institutions require sufficient liquid assets to enable them to meet their routine financial obligations. However, in Kenya, microfinance banks have been recording a declining trend regarding their financial performance over time, leading to grave concerns. Thus, this study aimed to assess cash management practices and their effect on Nairobi City County’s MFB's financial performance. The analysis and elucidation of the literature was facilitated by the examination of the Keynesian Liquidity theory. A descriptive research design with a regression analysis model was embraced in determining the predictor variable’s impact on the explained variable. Data review guide was then utilized to gather secondary data, which was obtained from the CBK and covered the years 2017 to 2022. According to the study, operational cash flow management and cash management significantly and favorably impacted the financial performance of Kenyan microfinance institutions. Nonetheless, the financial performance of Kenya's microfinance institutions was significantly impacted negatively by operational efficiency management. As per the study's findings, microfinance banks in Kenya carry out cash budget preparation, bank reconciliation, cash inflow and outflow recording, cash expense payment, and cash surplus investment. As a result, they manage their funds carefully. Furthermore, the stability and functioning of the financial system depend heavily on efficient cash flow management. It entails keeping an eye on money coming in from investments, sales, and outside funding sources as well as tracking money going out to pay for bills, obligations, and loan repayments. Microfinance banks are able to balance inflows and outflows, lower the risk of liquidity crises, and take advantage of growth possibilities by managing cash flow well. This allows microfinance institutions to make well-informed choices regarding debt management, expansion strategies, and investments—all of which are essential for overall financial success. To maximize the beneficial effects on financial performance, the study recommends adhering to the statutory minimum liquidity ratio. Since excessive liquidity and illiquidity reduce the institutions' profitability, microfinance banks should implement effective cash management procedures.