The Effect of Leverage on The Asset Quality of Deposit-Taking Microfinance Banks in Kenya
DOI:
https://doi.org/10.47941/ijf.3838Keywords:
Leverage, Asset Quality, Deposit-Taking Microfinance BanksAbstract
Purpose: This study investigated the effect of leverage on the asset quality of deposit-taking microfinance banks in Kenya.
Methodology: The study central premise was based on the agency, moral hazard and institutional theories. The study's target population was 14 deposit taking microfinance banks in Kenya with each individual bank panel data collected from their audited reports for the years 2019 to 2023. Longitudinal design was the most ideal given the balanced panel data of the banks. Panel data regression was used in determining the causality between the predictor and response variables.
Findings: Correlation results showed that leverage (r = 0.316, p = 0.007) had a positive correlation with asset quality. Hypotheses results indicated that leverage (p = 0.027, β = 1.052) exerted a positive and significant effect on asset quality.
Unique Contribution to Theory Practice and Policy: The study recommends that banks management should accumulate more leverage up to the optimal leverage position to lower the agency cost between shareholders and stockholders. Through, additional leverage banks can be incentivized to monitor borrowers through debt, since it forces them to exercise control over profitable enterprises to pay off maturing commitments, and thus improve the asset quality.
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Copyright (c) 2026 Grace Jane Andahwa Ochami, Dr. Joshua Matanda, Dr. Ibrahim Tirimba Ondabu
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