MONITORING PRACTICES AND THE SUSTAINABILITY OF MICROFINANCE BANKS IN KENYA

Abstract

Microfinance banks (MFBs) in Kenya play a vital role in financial inclusion, serving over 850,000 active borrowers and holding 1.2 million deposit accounts, which represent 34 percent of the national microfinance portfolio. Despite this critical role, the sector has experienced worrying sustainability challenges. In 2022, liquidity assets fell by 13.4 percent, while deposits declined by 7.8 percent to KShs. 46.5 billion. Several institutions failed to meet the statutory minimum liquidity ratio of 20 percent, and collective pre-tax losses increased from Kshs. 877 million in 2021 to Kshs. 980 million in 2022. This study examined the effect of monitoring practices on the sustainability of 14 Central Bank of Kenya-regulated MFBs from 2016 to 2023. Monitoring practices were measured through portfolio-at-risk and operating expense ratios, while sustainability was assessed using financial self-sufficiency. Employing a positivist philosophy and a longitudinal panel design, secondary data were extracted from audited statements and analyzed using panel regression in E-Views, with Hausman specification tests guiding model selection. Findings revealed that monitoring practices negatively affected sustainability in both current (β=-0.05, p=0.000) and lagged periods (β=-0.07, p=0.000). The study concluded that intensive surveillance undermined institutional performance and recommended outcome-based regulation and streamlined monitoring systems. These results extend Management Control Theory by demonstrating that excessive monitoring can generate dysfunctional outcomes that weaken rather than strengthen sustainability.