MACROECONOMIC VARIABLES AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA
MACROECONOMIC VARIABLES AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA
John Maina Muriuki - Postgraduate Student, Accounting and Finance Department, Kenyatta University, Kenya
Dr. Charity Njoka - Lecturer, Department of Accounting & Finance, School of Business, Economics and Tourism, Kenyatta University, Kenya
ABSTRACT
Microfinance banks play a vital role in promoting financial inclusion by providing financial services to low-income households and small businesses. However, their performance is vulnerable to macroeconomic factors, with inflation, high interest rates, and exchange-rate volatility contributing to declining profitability. Conversely, economic growth improves borrower incomes and strengthens MFB performance, while adequate capital buffers enhance resilience and sustainability. The empirical evidence on the magnitude of these effects and the role of capital adequacy remains limited in developing economies. This research examined and analysed the influence of inflation, GDP growth, interest rates, and exchange rates on financial performance measured using Return on Assets. The study utilized a quantitative research approach and employed a panel research design utilizing secondary data from licensed MFBs in Kenya over the study period. Data were analysed utilizing descriptive statistics, diagnostic tests, correlation analysis, and panel regression techniques. The results indicated that inflation had a statistically significant negative effect on financial performance (β= −0.0286, p<0.05), while GDP growth had a positive and significant effect (β=0.0319, p<0.05). Interest rates were found to adversely and significantly affect ROA (β= −0.0417, p<0.05), and exchange rates also exhibited a significant adverse connection with financial performance (β= −0.0138, p<0.05). The moderation analysis revealed that capital adequacy significantly moderates the connection between macroeconomic variables and financial performance. The interaction terms for inflation and capital adequacy (β=0.0168, p < 0.05), GDP growth and capital adequacy (β=0.0193, p<0.05), interest rates and capital adequacy (β=0.0141, p<0.05), and exchange rates and capital adequacy (β=0.0117, p<0.05) were all positive and statistically significant, indicating that higher capital adequacy cushions microfinance banks against adverse macroeconomic shocks. Based on the findings, the study recommends the promotion of macroeconomic stability through prudent fiscal and monetary policies, strengthening capital adequacy regulations to ensure sufficient capital buffers, and enhancing institutional risk management practices within microfinance banks.
