Capital Adequacy Management and Profitability of Microfinance Banks in Kenya

Fridah Naitore Mwiti and Margaret Kosgei
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Fridah Naitore Mwiti: Department of Accounting and Finance, School of Business, Economics, & Tourism, Kenyatta University, Kenya.
Margaret Kosgei: Department of Accounting and Finance, School of Business, Economics, & Tourism, Kenyatta University, Kenya.

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Abstract: Microfinance institutions are vital for extending financial services to underserved and economically disadvantaged groups. In Kenya, the growth of the financial markets significantly augments this access, meeting the needs of a vast populace that depends on the microfinance industry. In spite of their enormous input to socio economic expansion, over time, the financial success of microfinance banks has fluctuated. The banks disclosed a drop in ROA in 2022 from 2.7 percent in 2018 to 2.5 percent. Therefore, this research explored the effect of capital adequacy management on profitability of Microfinance banks in Kenya for the year 2018-2024. This study specifically sought to establish the effect of asset quality, core capital ratio, and asset base on profitability of Microfinance banks in Kenya. The investigation was anchored on agency, Capital buffer theory, profit incentive theory, and shiftability theory. A descriptive research framework guided this study, encompassing fourteen 14 microfinance institutions selected through census sampling methodology. Secondary data collection was drawn from Central Bank of Kenya digital resources, including annual supervisory reports and AMFI institutional publications. The dataset undergo comprehensive diagnostic evaluation through stationarity testing, autocorrelation analysis, multicollinearity assessment, normality verification, and heteroscedasticity examination to ensure panel data integrity. Statistical analysis incorporated descriptive metrics alongside inferential panel regression modeling for thorough data interpretation. Research conduct maintained full compliance with academic ethical protocols. Findings showed that core capital ratio positively influenced profitability but this was only insignificant. Asset quality had an insignificant positive influence on profitability. The results indicated that the asset base positively and significantly influenced profitability. The outcome revealed that bank competition has an insignificant negative moderating effect on the capital adequacy-profitability nexus in the Kenyan context of microfinance banks. The study recommends that the financing approach that should be taken by microfinance banks is to maintain a balanced approach to capital management by gradually increasing the capital buffers to conform to prudential needs and at the same time, investing the excess capital in productive lending and investment opportunities that directly yield revenue instead of being inefficient due to idle capital.

Date: 2026-02-05
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Published in Asian Basic and Applied Research Journal, 2026, 8 (1), pp.62-80

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-05539196

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