FINANCING STRUCTURE AND LIQUIDITY POSITION OF MICROFINANCE BANKS IN KENYA

Abstract

Microfinance banks' liquidity positions have been erratic and unstable over time. Between 2012 and 2017, the overall liquidity trends of Kenyan MFBs fluctuated between a low of 25% and a high of 36%, with some individual microfinance banks registering liquidity ratios below the regulatory threshold of 20%, indicating instability. This study aimed to investigate the effect of financing structure on the liquidity position of microfinance banks (MFBs) in Kenya. Specifically, it sought to determine how customer deposits and equity financing influence the liquidity position of these banks. The study was anchored in agency theory, pecking order theory, trade-off theory, and liquidity preference theory. An explanatory research design within the positivist philosophy framework was adopted. The target population comprised the 13 MFBs registered with the Central Bank of Kenya (CBK), utilizing panel data from publicly available audited financial statements. Data analysis was conducted using panel regression, Pearson correlation, and descriptive statistics, and the results were presented in tables and figures. Hypotheses were tested at a significance level of 0.05, and ethical guidelines were followed throughout. The study found that customer deposits and equity financing had positive and significant effects on the liquidity position of MFBs. Based on these findings, the study recommends policy measures that encourage MFBs to increase their reliance on equity financing by promoting access to diversified equity sources and offering incentives like tax breaks. Additionally, promoting innovation in savings products and implementing educational campaigns can enhance customer deposit mobilization. These policy recommendations aim to foster a more stable liquidity environment for microfinance banks in Kenya.