MODERATING EFFECT OF INSTITUTIONAL SIZE ON THE RELATIONSHIP BETWEEN EQUITY FINANCING AND LENDING PROPENSITY OF MICROFINANCE BANKS IN KENYA

Resumo

Globally, bank lending remains a critical issue, sparking continuous debate in both policy and academic circles. The lending propensity of financial institutions, including microfinance institutions (MFIs), averages 133.8% of GDP globally, while Sub-Saharan Africa lags at 45.5%. In Kenya, lending as a percentage of GDP has declined from 35.22% in 2015 to 12.2% in 2023, despite policy interventions such as interest rate caps. Given that over 75% of GDP is driven by credit availability, this trend presents a significant economic concern. Existing studies have explored factors influencing lending, with mixed findings regarding equity financing and institutional size. However, most research is based on data from developed economies, while studies in emerging markets, including Kenya, focus primarily on commercial banks rather than microfinance banks (MFBs). Moreover, limited research on Kenyan MFBs examines lending propensity. Consequently, a knowledge gap exists on whether equity financing and institutional size affect the lending behavior of MFBs in Kenya. The primary objective of this study was to examine the influence of institutional size on the lending propensity of MFBs in Kenya. Specific objectives include assessing the impact of equity financing and institutional size on lending propensity, and evaluating whether institutional size moderates the relationship between equity financing and lending propensity. The study is grounded on the Bank Capital Channel Theory and Pecking Order Theory. A correlational research design was employed, using secondary data from 10 purposively sampled MFBs between 2015–2023, yielding 90 observations. Moderated Multiple Regression was used for analysis. Findings show equity financing negatively affects lending propensity (β = -0.421), institutional size positively influences it (β = 0.251), and size significantly moderates the relationship (β = 0.108). The study recommends strengthening capital buffers, pursuing mergers, and advocating regulatory reforms.

JEL: G21, G32, L25, O16

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