Capital Adequacy and Financial Performance of Microfinance Banks in Kenya

Abstract

The study examined the effect of capital adequacy on financial performance of microfinance banks in Kenya. Capital buffer theory and stakeholder theory was utilized. Causal research design was adopted and fourteen microfinance banks were targeted. Thirteen microfinance banks were selected based on purposive sampling technique which was informed by the time scope of the study which is 2013 to 2019. Secondary panel data was used and consequently, panel regression analysis was applied. The study concluded that core capital to total assets ratio is a significant predictor of financial performance of microfinance banks in Kenya. It was also concluded that core capital to total deposits ratio is important in determining the financial performance of microfinance banks in Kenya. The study recommends that microfinance banks should strive towards holding capital buffer with regards to core capital in relation to total assets upon reaching the minimum requirements. This should however be done in a prudent manner where financial intermediation role is not distorted. A joint core capital and total deposits objective should be put in place by the management of microfinance banks. The study recommends that the capital adequacy guidelines by the Central Bank of Kenya should be in view of underlying banking conditions. Capital regulatory and supervisory initiative by the apex bank should balance between protecting depositors and ensuring stable financial performance.

Keywords: Capital Adequacy, Core Capital to Total Assets Ratio, Core Capital to Total Deposits Ratio, Financial Performance and Microfinance Banks

DOI: 10.7176/RJFA/15-4-05

Publication date: April 30^th 2024