Effect of financial technologies on financial sustainability of deposit taking microfinance banks in Kenya

Abstract

The financial sustainability of deposit-taking (DT) microfinance banks in Kenya has been a growing concern despite the increasing adoption of financial technologies (fintech). While fintech innovations like online lending platforms, digital payment systems and mobile banking, are expected to enhance efficiency and expand financial inclusion, their impact on sustainability remains unclear. Recent trends indicate a decline in key financial sustainability indicators, consisting Return on Assets and Return on Equity, raising questions about the effectiveness of fintech adoption. Many microfinance banks continue to face operational challenges, including high implementation costs, low customer adoption rates, and cybersecurity vulnerabilities. This study aims to assess the effect of financial technologies on the financial sustainability of DT microfinance Kenyan banks. The general objective of the study was to examine the effect of financial technologies on financial sustainability of deposit taking microfinance banks in Kenya. The specific objectives were to examine the effect of online lending platforms, mobile banking, card payment systems and internet banking on financial sustainability of deposit taking Kenyan microfinance banks. The research was anchored on resource-based view, diffusion of innovation theory, and unified theory of acceptance and use of technology. The research used an explanatory research design. The target population was all the 14 deposit taking Kenyan microfinance banks. The study adopted a census approach and hence the whole population will be included in the study. The research employed secondary data, which was obtained from Bank supervision reports by CBK as well as the annual financial statements of individual microfinance banks in Kenya. The study covered the period between 2019 and 2023. Panel data was generated using a data collection checklist. The study used both descriptive and inferential statistics in data analysis with the assistance of STATA 14. Descriptive statistics included mean, percentages, frequencies, standard deviation, as well as minimum and maximum values. Inferential statistics included panel regression analysis. Tables and figures, such as line graphs, were used to present the results. The study found that mobile banking has a positive and significant effect on the financial sustainability of microfinance banks in Kenya. In addition, the study established that online lending platforms have a positive but statistically insignificant effect on the financial sustainability of microfinance banks in Kenya. Further, the study revealed that card payment systems have a positive and statistically significant effect on the financial sustainability of microfinance banks in Kenya. Moreover, the study found that internet banking has a statistically significant negative effect on the financial sustainability of microfinance banks in Kenya. The study concludes that, in Kenya’s microfinance banks, mobile banking and card payment systems significantly enhance financial sustainability, online lending platforms have an insignificant positive effect, and internet banking exerts a significant negative impact. The study recommends expanding mobile banking and card systems, improving online lending adoption, and reassessing internet banking strategies to enhance financial sustainability in microfinance banks.