Moderating Effect of Firm Size on The Relationship Between Credit Risk and Financial Performance of Microfinance Banks in Kenya
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Date
2023-03Author
Ishmail, Daniel Mwasa
Memba, Florence
Muriithi, Jane
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Show full item recordAbstract
Microfinance banks (MFBs) in Kenya have
continued with a trend of posting high
aggregate annual losses in contrast to other
financial institutions in banking sectors
such as commercial banks. The commercial
banks demonstrated to be resilient and
reported improved financial performance.
The aim of the study was to explore the
moderating effect of Firm Size on the
relationship between credit risk and
financial performance of Microfinance
banks in Kenya. The target population was
MFBs regulated by Central Bank of Kenya
(CBK). The study employed census
method. Secondary data for thirteen (13)
MFBs was collected from published annual
reports for the period 2011-2019. The study
employed explanatory research design.
Unbalanced panel regression model was
employed to examine the impact of
independent variables on dependent
variable using unbalanced panel data. The
dependent variable, financial performance
was measured by Return on Equity (ROE).
The independent variable credit risk was
measured with following ratios Net nonperforming loan ratio, Asset quality ratio,
Loan Loss Provision to total Loan ratio and
Loan Loss Provision to total equity ratio
while the total asset of MFBs was the
indicator of the moderating variable, firm
size. The finding depicted Credit risk had
negative significant effect on financial
performance. The model F statistics
indicated a strong statistical significance of
credit risk on financial performance of
MFBs at 5% level of significance. The
finding further showed that the firm size
had a positive significant moderating effect
on the relationship between credit risk and
financial performance, thus depict that
large sized MFBs were better placed in
managing credit risk. Inconclusion, the
negative and significant relationship
between credit risk and financial
performance indicate poor asset quality or
high non-performing. The study
recommends that management of MFBs
establish stringent credit policy and robust
credit risk management framework to
reduce non-performing loans and default
levels.