EFFECT OF LOAN LOSS PROVISIONING, CAPITAL ADEQUACY AND COST OF OPERATIONS ON FINANCIAL PERFORMANCE OF MICRO FINANCE INSTITUTIONS IN KAKAMEGA COUNTY, KENYA
Abstract
This study sought to investigate determinants of Micro Financial Institutions financial performance in Kakamega County, Kenya. The study adopted descriptive survey and targeted 122 senior management staff from 17 MFIs located in Kakamega County. The study used structured questionnaire as its research tool. The data collected was coded for accuracy of information at the end of every field data collection day and stored both manually and electronically. Computer software, Statistical Package for Social Sciences (SPSS) version 23 was used in data analysis. A total of 85 respondents out of the sampled 94 respondents returned completely filled questionnaires representing a response rate of 90.4%, thus good for generalizability of research findings to a wider population. From the values of unstandardized regression coefficients with standard errors in parenthesis, all the independent variables (cost of operations; β = -0.284 (0.103) at p<0.05; loan loss provision; β = 0.389 (0.107) at p<0.01; capital adequacy; β = 0.518 (0.112) at p<0.01; were significant predictors of Micro Financial Institutions ROI (dependent variable). The study concluded that capital adequacy significantly influences Micro Financial Institutions return on investment in Kakamega County, Kenya; indicating that capital adequacy issues such as, adequate capital base, relative capital and minimum capital requirements have a significant bearing on Micro Financial Institutions return on investment; The study recommended that one; MFIs should enact effective costs saving measures that can impact positively on MFIs return on investment so as to maintain a competitive edge; two, MFI ought to engage in viable loan loss provisioning such as long term debt financing, provisioning for bad debts, a priori loan loss reserve and appropriate provision expenses so as to realize an increase in return on investment; lastly, MFIs should adhere to mandatory minimum capital requirements and accrue an adequate capital base that can effectively run their loan portfolios so as to continuously realize a positive return on investment.
Key Words: Cost of Operations, Loan Loss Provisions, Capital Adequacy, Financial Performance
CITATION: Magomere, F. A., & Otinga, H. N. (2019). Effect of loan loss provisioning, capital adequacy and cost of operations on financial performance of micro finance institutions in Kakamega County, Kenya. The Strategic Journal of Business & Change Management, 6 (1), 200 – 219.
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DOI: http://dx.doi.org/10.61426/sjbcm.v6i1.1052
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