Effect of Financial Inclusion on Performance of Microfinance Banks in Kenya

Abstract

Financial inclusion brings closer financial services at affordable costs to sections of disadvantaged and low-income segments of society. There have been many formidable challenges in financial inclusion such challenges include; bridging the gap between the sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms so as to promote financial economic growth. A nation can grow economically and socially if its weaker section can turn out to be financially independent. Kenya strives to become a regional financial hub with vibrant, efficient and globally competitive financial system to drive savings and investments by the year 2030, where financial inclusion has been identified as a key driver. However, there is paucity of information on the contribution of financial inclusion on performance of micro finance banks in Kenya. It is on this basis that the study sought to determine the effect of financial inclusion on financial performance of micro finance banks in Kenya. The study was guided by Expectations Theory, Contracting Cost Theory and Market Hypothesis Theory. A census study was carried out for all the twelve (12) microfinance banks in Kenya. The study relied on secondary data covering the period 2015-2019 and this was obtained from audited financial statements of the microfinance banks. Correlational research design was adopted. Random and Fixed effects panel data models were estimated to establish the relationships. Choice of the best model between the two was done using the Hausman test where random effect was selected. Post estimation tests including multicollinearity, autocorrelation and heteroscekedastity work conducted. An insignificant negative relationship was established between firm size and return on assets (Coef= -.0014368, p >0.05). Similarly, the study established insignificant negative relationship between interest rates and financial performance as measured by return on asset (Coef= -.0888295, p >0.05). However, there was a significant positive relationship between operational efficiency and return on asset as a measure of financial performance (Coef= .394119, p <0.05). The study concluded that operational efficiency affected financial performance of micro finance banks in Kenya hence recommended that microfinance institutions should leverage on operational efficiency in order to make profit for shareholders.