WORKING CAPITAL MANAGEMENT AND FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN KENYA

Abstract

This study investigates the relationship between working capital management and the financial performance of 13 microfinance institutions (MFIs) in Kenya over the period 2015 to 2024. Microfinance institutions are instrumental in advancing financial inclusion and poverty alleviation, serving approximately 45% of Kenya’s informal sector. Despite notable improvements in liquidity — rising from 38% in 2019 to 81% in 2022 — many MFIs have continued to record weak financial performance, with negative average Return on Assets (ROA) figures, including -6% in 2024. These trends, particularly among large MFIs with a dominant market share, raise concerns regarding institutional sustainability and their ability to support long-term development goals. The study focused on four core components of working capital management: liquidity management, and loan portfolio management to explore how they affect financial performance (measured in terms of ROA). A mixed research design, combining cross-sectional and longitudinal (panel data) approaches, was employed. Secondary data was obtained from audited financial statements of the 13 selected MFIs over the ten-year period. The study variables were measured based various indicators. Liquidity management was assessed using the ratio of cash and cash equivalents to total assets. Loan portfolio management was evaluated using loan loss coverage ratio while financial performance was measured in terms of ROA. The data was analyzed based on descriptive statistics (mean, standard deviation, skewness and kurtosis) as well as inferential statistics (correlation and regression analysis). Findings revealed a positive but insignificant relationship between liquidity management, with financial performance. However, there was a significant negative relationship between loan portfolio management and financial performance. The study concluded that liquidity management, has insignificant positive effect on financial performance, while loan portfolio management has a significant negative effect. The insignificant positive effect is attributed to poor liquidity management, while poor loan portfolio management is considered the cause of its significant negative effect. The study therefore provides several recommendations to streamline each of them towards enhancing performance including hiring qualified financial analysts and proficient credit management professionals among other measures.

Key Words: Working Capital Management, Financial Performance, Microfinance Institutions (MFIs), Liquidity Management, Loan Portfolio Management, Kenya