The Relationship between Firm Size and Profitability of Microfinance Institutions in Kenya

Abstract

Purpose: Firm size determines the kind of relationship that a firm enjoys outside and within its operating environs. Hence, the study sought to determine the relationship between firm size and profitability of microfinance institutions in Kenya.

Methodology: The study used a descriptive research. The population for the study included 27 microfinance institutions, which are licensed and operating in Kenya. The research considered five years (2016-2020). The variables were examined using percentages, mean, as well as standard deviation. A multiple linear regression model was used to find out the relationship between firm size and profitability of microfinance institutions in Kenya.

Findings: The findings indicated that there is a direct relationship between deposit accounts, loan accounts, branch networks, liquidity and capital adequacy with profitability of microfinance institutions in Kenya. On the other hand, there exists an inverse relationship between asset quality and profitability of microfinance institutions. The study concludes that most microfinance institutions are small in size and however most of them have experienced growth over the years in terms of deposit accounts, loan accounts, branch network, liquidity and capital adequacy. The study concluded that deposit accounts, loan accounts, branch network, liquidity and capital adequacy have a positive and significant relationship with profitability of microfinance institutions. However, asset quality has a negative and significant relationship with profitability of microfinance institutions.

Recommendation & Implications: The study recommended that microfinance institutions should identify their geographic market, including any exceptions or specific restrictions. The study recommended that microfinance institutions should make substantial expenditure in undertaking their due diligence before issuing loans. This can be drawn from the fact that large microfinance institutions have a lower ratio of non-performing loans than smaller microfinance institutions. Lastly, the study recommended that the microfinance institutions should develop comprehensive strategic plans detailing on how they will deal with NPLs in their occurrence in a systematic way.

Keywords: firm size, profitability, liquidity, branch networks, capital adequacy and microfinance