Effect of Financial Distress Factors on Profitability of Microfinance Banks Licensed by Central Bank of Kenya
DOI:
https://doi.org/10.17613/g7s1-x024Keywords:
Financial Distress, Financial Leverage, Liquidity, Non-Performing LoansAbstract
The study sought to examine the effect of financial distress factors on the profitability of microfinance banks (MFBs) licensed by the Central Bank of Kenya (CBK). The research adopted a causal research design and targeted the 13 MFBs licensed by CBK and operated between 2016 to 2020. The study targeted a period of five (5) years beginning from 2016 to 2020 forming panel data. The study was a census of all the 13 licensed Microfinance banks by CBK hence no sampling was carried out. The study collected annual secondary data from 2016 to 2020 from the 13 licensed Microfinance banks by CBK. The data was panel in nature and Microsoft Excel was used as a secondary data collection template as it is capable of inputting and managing the data. The collected panel data for the period between 2016 and 2020 was analyzed using Microsoft Excel. Descriptive statistics included mean, standard deviation, minimum and maximum. Regarding inferential statistical analysis, the OLS regression model was adopted to estimate the coefficients and associated p-values to enable the fitting of the model and forecasting. The analysis of variances revealed that financial distress factors (financial leverage, liquidity and non-performing loans) have a significant impact on profitability captured by ROA. Further, the effect of liquidity on the profitability of licensed MFBs was inverse but not statistically significant. The study also revealed that financial leverage had a direct and statistically significant effect on the profitability of licensed MFBs. Finally, the study revealed that the impact of non-performing loans on profitability was inverse and statistically significant. The study thus concluded that distress factors including financial leverage, liquidity and non-performing loans have a major effect on profitability among the licensed MFBs in Kenya.
Downloads
References
Afolabi, T. S. (2020). Effect of Non-Performing Loans on Microfinance Banks’ Performance in Nigeria: A Granger Causality Approach.
Banafa, A. S. A. (2016). The effect of leverage, liquidity, and firm size on the financial performance of listed non-financial firms in Kenya (Doctoral dissertation, COHRED, Business administration, JKUAT).
Bartram, S. M., Brown, G. W., & Waller, W. (2015). How important is financial risk? Journal of Financial and Quantitative Analysis, 50(4), 801-824. doi:10.1017/S0022109015000216
Budhathoki, P. B., Rai, C. K., Lamichhane, K. P., Bhattarai, G., & Rai, A. (2020). The Impact of Liquidity, Leverage, and Total Size on Banks’ Profitability: Evidence from Nepalese Commercial Banks. Journal of Economics and Business, 3(2).
Caliskana, M. T., & Lecuna, H. K. S. (2020). The Determinants of Banking Sector Profitability in Turkey. Business and Economics Research Journal, 11(1), 161-167
Chabachib, M., Yudha, A., & Udin, U. (2020). The role of firm size on bank liquidity and performance: A comparative study of domestic and foreign banks in Indonesia. International Journal of Economics and Management Systems, 5.
Ekinci, R., & Poyraz, G. (2019). The effect of credit risk on the financial performance of deposit banks in Turkey. Procedia Computer Science, 158, 979-987. https://doi.org/10.1016/j.procs.2019.09.139
Estrin, S., & Pelletier, A. (2018). Privatization in developing countries: what are the lessons of recent experience? The World Bank Research Observer, 33(1), 65-102. https://doi.org/10.1093/wbro/lkx007
Hirshleifer, J. (1966). Investment decision under uncertainty: Applications of the state preference approach. The Quarterly Journal of Economics, 80(2), 252-277. https://doi.org/10.2307/1880692
Imdad Akash, R. S., Hamid, K., & Mahmood, I. (2020). Do US News and Volatility in Exchange Rate Exposure Matter (Empirical Evidence from Emerging Economies). Global Social Sciences Review, 1, 198-208. https://doi.org/10.31703/gssr.2020(v-i).21
Irungu, G; 2013, March 19. Bank loan risks rise despite profits. The Business Daily. Retrieved from http://www.businessdailyafrica.com
Junaidi, S., Sulastri, S., Isnurhadi, I., & Adam, M. (2019). Liquidity, asset quality, and efficiency to sustainable growth rate for banking at Indonesia Stock Exchange. Jurnal Keuangan dan Perbankan, 23(2), 308-319.
Kahuthu, D. G. (2016). Impact of prudential regulation on the financial performance of deposit-taking savings and credit cooperative societies in Kenya (Doctoral dissertation, COHRED, JKUAT).
Kariuki, H. (2013). The effect of financial distress on the financial performance of commercial banks in Kenya. Kenya.
Kirimi, P. N., Simiyu, J., & Murithi, D. (2017). Effect of debt finance on the financial performance of savings and credit cooperative societies in Maara Sub-County, Tharaka Nithi County, Kenya.
Kithinji, A., and Waweru. N. 2017. Merger Restructuring and Financial Performance of Commercial Banks in Kenya. Economic, Management and Financial Markets Journal, 2 (4), 9-39
Mariano, S. S. G., Izadi, J., & Pratt, M. (2021). Can we predict the likelihood of financial distress in companies from their corporate governance and borrowing? International Journal of Accounting & Information Management. https://doi.org/10.1108/IJAIM-08-2020-0130
Miller, M. H. (1977). Debt and taxes. the Journal of Finance, 32(2), 261-275. https://doi.org/10.2307/2326758
Miller, M. & Orr, D. (2016). A model of the demand for money by firms. The Quarterly Journal of Economics, (81), 413-435. https://doi.org/10.2307/1880728
Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297. https://www.jstor.org/stable/1809766
Published
Issue
Section
License
Copyright (c) 2023 Franciscah Kitheka (Author)
This work is licensed under a Creative Commons Attribution 4.0 International License.
How to Cite
