Liquidity Management and Financial Performance of Microfinance Institutions in Kenya

Liquidity management is one of the most important duties in any company and thus it cannot be overlooked. Sound liquidity management is integral for financial institutions stability and profitability since deteriorating liquidity management is the most recurrent cause of poor financial performance. In many financial institutions, the biggest risk is lending money and not getting it back leading to liquidity problems as most MFIs in Kenya have no access to a lender of the last resort which is the Central Bank of Kenya. The study investigated the effect of liquidity management on the financial performance of MFI's in Kenya. Secondary data on the study variables were deduced from the audited financial statements of the MFIs under consideration. The data was obtained from the CBK website, CBK’s Annual Supervision reports and also the AMFI annual reports for 5 years from 2012-2016. The desired population of the research consisted of all the twenty-six MFIs in Kenya that were members of AMFI and available at the CBK website. Primary data was collected using questionnaires whereas the secondary data involved analysis of the audited financial statements. The study used both descriptive and inferential statistics to evaluate the data. In descriptive analysis mean, and standard deviation of the responses was analyzed whereas, under inferential statistics, Pearson correlation, panel power correlation and regression analysis were adopted. The analysed data indicated that liquidity management practices fundamentally influenced the financial performance of MFIs in Kenya. The asset quality and maturity gap had a negative but insignificant effect on financial performance whereas capital adequacy had a positive and significant effect on the financial performance of MFIs. The study proposes that MFIs should strive to manage their loan portfolio to reduce delinquent loans as they reduce the MFIs profits, bank advances to customers should also be managed not to exceed customer deposits to reduce the liquidity gap. Management should develop strategies for liquidity management in MFIs. Similarly, capital adequacy enabled the MFIs to absorb shocks that may occur within the financial markets and should be managed to prevent MFIs from financial instability to improve financial performance.