LOAN PORTFOLIO SIZE AND FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN KENYA
LOAN PORTFOLIO SIZE AND FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN KENYA
Emmah Wanjiru Chege - Jomo Kenyatta University of Agriculture and Technology, Kenya
Kalundu Kimanzi - Jomo Kenyatta University of Agriculture and Technology, Kenya
Lucy Njogu - Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Microfinance institutions (MFIs) are vital in advancing financial inclusion by offering credit and other financial services to low-income households and small businesses that are often excluded from traditional banking systems. Their long-term sustainability heavily relies on strong financial performance. Loan portfolio size, which indicates the total value of loans extended to borrowers, is a key measure of an institution’s lending capacity, outreach, and revenue potential. This study investigated how loan portfolio size affects the financial performance of microfinance institutions in Kenya. Using Modern Portfolio Theory, the research analyzed secondary panel data from licensed MFIs collected between 2015 and 2024. Financial performance was assessed through Return on Assets (ROA), while loan portfolio size was measured by the Gross Loan Portfolio to Total Assets Ratio. Data analysis involved descriptive statistics, correlation analysis, and panel regression techniques to explore the relationship between these variables. Results showed that loan portfolio size has a positive and significant effect on the financial performance of Kenyan MFIs. Larger loan portfolios enable MFIs to earn more interest income, improve operational efficiency, benefit from economies of scale, and expand market reach, all of which contribute to greater profitability. The study emphasizes that sustainable growth in loan portfolio size is crucial for enhancing financial performance and ensuring the long-term viability of microfinance institutions. Nevertheless, portfolio expansion must be paired with effective credit risk management, prudent lending practices, and ongoing loan-quality monitoring to reduce default risk and maintain financial stability. The research recommends that MFIs develop strategic policies for portfolio growth and strengthen credit management systems to improve profitability and institutional sustainability.
