EFFECT OF CENTRAL BANK OF KENYA REGULATIONS ON THE FINANCIAL PERFORMANCE OF MICROFINANCE BANKS

Abstract

The purpose of this study was to examine the effect of Central Bank of Kenya regulations on the financial performance of Microfinance banks. The study employed a descriptive design. The target population of this study was the 13 Microfinance banks licensed by the Central Bank of Kenya as at 31 st December 2016. A census study was conducted where all the 82 staff working in the Risk, Compliance and Finance departments of all Microfinance banks in Kenya were included in the sample. The study relied on both primary and secondary data. Data was analyzed by aid of Statistical Package for Social Sciences (SPSS). The study revealed that capital adequacy affects the financial performance of Microfinance banks greatly and deduced that the core capital/ total risk weighted assets (TRWA) ratio of 10% and total capital/ total risk weighted assets (TRWA) ratio of 12% are high and the capital requirement of Kshs. 60 million for nationwide Microfinance banks was high and Kshs. 20 million for community Microfinance banks was moderate. The study also found that statutory requirements affect the financial performance of  Microfinance banks greatly where it deduced that liquidity ratio of 20% is high  for Microfinance banks in Kenya and led to reduced financial performance. The study further showed that operational requirements affect the financial performance of the Microfinance banks greatly. The study finally indicated that financial reporting requirements affect the financial performance of Microfinance banks greatly. The study concluded that statutory requirements had the greatest effect on the financial performance of Microfinance banks in Kenya, followed by capital adequacy , then operational requirements while financial reporting requirements had the least effect on the financial performance of Microfinance banks in Kenya. The study recommended that in order to facilitate favorable financial performance of MFBs, the institutions should prudently manage their liquidity, minimum capital requirements should be set based on the institutions risk appetite and the institutions should explore strategies to improve their operational efficiency. Key Words: Capital Adequacy Requirements, Statutory Requirements, Operational Requirements, Financial Reporting, Financial Performance of Micro Finance Banks