FINANCIAL LEVERAGE AND LIQUIDITY POSITION OF MICROFINANCE BANKS IN KENYA

Abstract

The liquidity position of microfinance banks (MFBs) plays a pivotal role in their financial stability and their ability to fulfill their mission of promoting financial inclusion and alleviating poverty in Kenya. Financial leverage, primarily through debt financing, is a significant source of funding for MFBs, yet its impact on their liquidity position remains unclear in existing empirical evidence. Hence, this study investigates the effect of financial leverage on the liquidity position of microfinance banks (MFBs) in Kenya and provides recommendations for policy and practice. Using panel data analysis covering the period from 2012 to 2021, the study investigates the effect of financial leverage on liquidity position of microfinance banks. The findings indicate a significant relationship between financial leverage and liquidity, with higher levels of leverage affecting liquidity both positively and negatively depending on the leverage structure and management. Recommendations for policymakers include enhancing the regulatory framework governing MFBs to ensure prudent debt management and promoting transparency in financial reporting practices. For practitioners, the study recommends optimizing the debt-to-equity ratio, diversifying funding sources, and integrating leverage management into strategic planning processes. Overall, the study underscores the importance of prudent financial leverage management in supporting the liquidity position of MFBs in Kenya and offers actionable insights for policymakers and practitioners to enhance financial stability, resilience, and the promotion of financial inclusion.