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Ibrahim Galo Walde - Master of Business Administration Student (Finance option), Kenyatta University, Kenya

Dr. Daniel Makori - Department of Accounting and Finance, School of Business, Kenyatta University, Kenya


The total loans to deposits ratio for the past ten years up to the year 2019 for the DTMFIs have exceeded the proposed ratio of 70% and indicates that there is a continued reflection that the appetite for loans in the DTMFIs structure outweighs the mobilization of deposits to fund the same and this forced the DTMFIs to finance part of their loans by mobilizing funds from external sources and this affects their liquidity. The rise in the loan to deposit ratio over the years is attributed to macro-economic variables changes such as inflation and interest rate. The general objective of the study was to establish effect of macroeconomic variables on the financial performance of the DTMFIs in Kenya. The specific objectives of the study were to establish the effect of inflation rate, interest rate, gross domestic product and exchange rate on financial performance of DTMFIs in Kenya. Theories that anchored the study include market timing theory, the pecking order theory and trade off theory. The causal research design was employed in the study. The study adopted census where all thirteen (13) DTMFIs that are operational in Kenya were considered. The study utilized secondary data which was obtained from the annual supervisory reports on DTMFIs by CBK and KNBS for duration of ten (10) years (2010-2019). Diagnostic tests that were carried out include multicollinearity test, linearity test, heteroscedasticity test, normality test, unit root test and autocorrelation test. Karl Pearson correlation moment and multiple regression analysis model was used to analyze data. Multicollinearity results showed that there was a weak correlation between interest rate and financial performance. There was a very weak correlation between inflation rate and financial performance, the correlation between exchange rate and financial performance was moderately strong while the correlation between GDP and the financial performance was strong. Additionally, the correlation was positive for interest rate, inflation rate and GDP and negative for the exchange rate. Further the correlation coefficient between the independent variables is below 0.8 hence no severe multicollinearity as Greene (2008) stated that if correlation is 0.8 or -0.8, it shows high multicollinearity level. Linearity test results showed that the data passed the linearity test since the variables were linear in form. Heteroscedastic test results further showed that the data was not heteroscedastic and all VIFs were below one thus it was concluded that there was no normality in the dataset. Unit root test showed that the data passed the stationary test. The regression results showed that the interest rate has a statistically insignificant negative effect on financial performance of DMTFIs at the 5% significance level while inflation rate has a statistically insignificant positive effect on financial performance of DMTFIs at the 5% significance level. Results further showed that the exchange rate has a statistically insignificant negative effect on financial performance of DMTFIs at the 5% significance level while GDP has a statistically significant positive effect on financial performance of DMTFIs at the 5% significance level. The study recommends that interest rates for the DTMFIs should be controlled by the government through macroeconomic regulators such as CBK for them to be able to provide financial intermediation services effectively and sustainably. Additionally, there is need for the DTMFIs management committees to continuously monitor inflation rate for them to adjust their loan products in line with the inflation rate. The government should also regulate the exchange rates such that they lead to economic growth and in favour of the DTMFIs which will facilitate the financial health of the DTMFIs thus increased economic growth. Finally, there is need for the government to ensure the business environment is conducive to encourage investment in the DTMFIs since they have a great impact on the GDP through creation of employment.

Full Length Research (PDF Format)