Deposit Taking Microfinance Institutions (DTMs) play a vital role in the economic resource allocation of countries as well as other financial institutions like banks and Savings and Credit Cooperative Societies (SACCOs). They channel funds from depositors to investors continuously. They can only do so effectively, if they generate necessary income to cover the operational cost they incur in the due course. In other words for sustainable intermediation function, DTMs need to be profitable. Beyond the intermediation function, the financial performance of DTMs and financial institutions in general has critical implications for economic growth of countries. Good financial performance rewards the shareholders for their investment. This, in turn, encourages additional investment and brings about economic growth. On the other hand, poor performance can lead to failure of DTMs and crisis which have negative repercussions on the economic growth.
Thus, financial performance analysis of DTMs has been of great interest to academic research. The performance of financial Institutions can be affected by internal and external factors (Al-Tamimi, 2010; Aburime, 2005). These factors can be classified into institution specific (internal) and macroeconomic variables. The internal factors are individual institution’s characteristics which affect the DTM's performance. These factors are basically influenced by the internal decisions of management and board. The external factors are sector wide or country wide factors which are beyond the control of the company and affect the profitability of DTMs. Studies show that performance of firms can also be influenced by ownership identity (Ongore, 2011).
In our study, we will concentrate on the internal factors that affect a DTM’s performance with a keen look at the liquidity of these financial institutions.
The microﬁnance movement is growing at a phenomenal rate in Kenya, for example, the average year-on year increase in the portfolio of the Kenyan microﬁnance sector over the period 2004-2009 was 107% (as compared with a mere 4% increase in commercial bank lending in 2008-09). According to FSD (2010), in the year 2009 microfinance institutions in Kenya were serving 17.9% of the total number of individuals in the financial sector as compared to 7.5% in 2006 (which represents a growth of 10.4% in a period of only 3 years).
As at 31st March 2013, 8 Deposit Taking Microfinance Institutions (DTMs) were in operation and had gross loans worth Ksh. 21.2 billion compared to Ksh. 20.6 billion registered in December 2012 thus translating to a growth of 3.7 percent. Similarly, the deposits base stood at Ksh. 16.4 billion representing a growth of 6.4 percent from Ksh. 15.4 billion in December 2012. The long-term borrowings by DTMs increased from Ksh. 8.3 billion in December 2012 to Ksh. 8.8 billion in March 2013. (CBK Report for the quarter ended March 31st, 2013)
Though the DTMs reported a higher growth of...