Liquidity Risk and Financial Performance of Deposit Taking Microfinance Banks in Kenya

Authors

  • Ooro Owino
    Master of Business Administration of Jomo Kenyatta University of Agriculture and Technology
  • Dr. Okibo Walter
    Jomo Kenyatta University of Agriculture and Technology
  • Dr. Onchangwa Gilbert Achochi
    Jomo Kenyatta University of Agriculture and Technology

Abstract

Purpose: The purpose of this study was to examine the influence of liquidity risk on the financial performance of Deposit Taking Microfinance Banks (DTMFBs) in Kenya. The study was guided by the Liquidity Preference Theory and the Financial Intermediation Theory.


Material/methods: The target population comprised all fourteen (14) registered Deposit Taking Microfinance Banks in Kenya, with the census method adopted due to the small population size. The study relied on secondary data, which were sourced from the Central Bank of Kenya (CBK), published financial records of DTMFBs, the Association of Microfinance Institutions (AMFI), and relevant databases and academic journals. The research instruments were pre-tested to ensure validity and reliability. Quantitative data were analyzed using descriptive statistics (frequencies, means, standard deviations) and inferential statistics, including Pearson correlation and multiple regression analysis. Data analysis was conducted using SPSS Version 22.0.


Findings: The study established a significant relationship between liquidity risk and the financial performance of DTMFBs. The regression analysis results indicated that liquidity risk is a critical determinant of financial performance in the microfinance banking sector.


Conclusion: The study concludes that effective liquidity risk management is essential for the financial sustainability of Deposit Taking Microfinance Banks in Kenya. Monitoring and mitigating liquidity risk can enhance stability and performance in the sector.


Value: This study provides empirical insights that can inform the development of risk management policies and regulatory frameworks. The findings are relevant for microfinance bank managers, policymakers, and financial sector regulators in Kenya and other jurisdictions with similar financial structures. The study also offers best practice recommendations that could be adopted to enhance the performance of microfinance banks.