Prudential Regulations and Profitability of Microfinance Banks in Kenya

Microfinance banks significantly add to the reduction of Kenya’s youth unemployment and poverty, which boosts the nation's economic development. Despite the implementation of prudential regulations aimed at enhancing financial stability and performance, many microfinance banks continue to struggle, as evidenced by a record decline in profitability over recent years. Therefore, this investigation examined prudential regulations effect on the Kenyan microfinance banks’ profitability. The effect of capital regulation on Kenyan microfinance banks’ profitability, liquidity regulation effect on Kenyan microfinance banks’ profitability and credit regulation effect on Kenyan microfinance banks’ profitability were examined. The study utilized fourteen microfinance finance banks which served as the target population. Census sampling was employed owing to the few microfinance banks in Kenya; hence, all the fourteen microfinance banks were utilized. Descriptive, correlation and panel regression technique was used as methods of data analysis. Findings uncovered that liquidity regulation insignificantly and positively affect the banks’ profitability; credit regulation possess inverse and insignificant effect on the banks profitability; capital regulation disclose a positive and significant effect on the banks profitability. The survey recommends that central bank should assess the current liquidity requirements and consider streamlining them to reduce unnecessary burdens on microfinance banks. This can involve revisiting reserve requirements, liquidity ratios, or other liquidity-related regulations to strike a balance between prudential safeguards and fostering profitability.