Relationship Between Asset Quality and Liquidity- Evidence From Microfinance Banks in Kenya

Abstract

The dynamism of the microfinance sector has benefited microfinance banks, resulting in significant transformation in the number of users served as well as the diversity of products and services offered. However, numerous microfinance banks have ended up with a liquidity ratio that is much lower than the required limit. Consequently, MFB deposits are dwindling, loan books are reducing, and profits are declining, all of which have an impact on MFBs' intermediation role. This study therefore sought to assess the relationship between asset quality and liquidity of microfinance banks in Kenya. The Efficient Structure Theory and Preference theory of Liquidity informed the study. This study employed causal research design and adopted the positivism research philosophy. The study population included all the 13 micro finance institutions, which were operations in Kenya between 2012 and 2018. The study adopted a census approach by focusing on all the 13 MFBs in Kenya. The study found that Asset quality had a positive and significant effect on liquidity of microfinance banks in Kenya. The study recommends that the management of Microfinance bank managers should capitalize on periods of high loan demand by offering attractive lending rates to attract more loan clients to maintain a stable liquidity position. However, it is important to ensure that the lending rates are moderate to avoid accumulating microfinance losses if the loan is not repaid in accordance with the agreed-upon contract. Keywords: Asset Quality, Liquidity, Efficiency Structure Theory, Liquidity Preference Theory and Microfinance Banks DOI: 10.7176/EJBM/15-10-06 Publication date: May 31 st 2023