📄 Abstract
Kenya's fourteen Central Bank of Kenya-licensed deposit-taking microfinance banks occupy a strategic position in extending formal financial services to low-income households, micro-enterprises, women, youth and rural communities, yet the sub-sector's financial condition has deteriorated on several dimensions even as headline profitability improved. Kenya Bankers Association (2024) data show that the sub-sector's non-performing loan ratio rose sharply from 14.5 percent in 2022 to 31.7 percent in 2023, even as return on assets rose from 1.39 percent to 3.72 percent and profit before tax more than doubled from Ksh.0.98 billion to Ksh.2.39 billion over the same period, a pattern in which portfolio quality and profitability moved in opposite directions rather than together. This divergence extends a longer real trend: Central Bank of Kenya data show sub-sector total assets already declining from Ksh.74.9 billion in 2020 to Ksh.73.9 billion in 2021, with net advances falling 9 percent over the same year, meaning the 2022-2023 pattern is the continuation of a documented multi-year decline, not an isolated event. A systematic literature review synthesising evidence published between 2015 and 2026 using the PRISMA framework, found that access, usage, quality and impact indicators of financial inclusion are consistently associated with improved financial performance of microfinance institutions, and that digital financial services moderate this relationship, but explicitly noted that the reviewed literature has focused on individual financial inclusion indicators rather than testing access, usage, quality and impact dimensions concurrently within a single quantitative model, and has not tested any mediating mechanism. Financial inclusion strategies positively influence the profitability of microfinance banks in Nairobi City County but treated digital financial services as an independent variable rather than a moderator, while another study found electronic banking improved microfinance institutions' return on assets without considering financial inclusion as a focal construct. No reviewed study has tested portfolio quality as a mediator linking financial inclusion to the financial performance of Kenyan microfinance institutions, despite the Kenya Bankers Association's documented divergence between asset quality and profitability. This study addresses that gap using twelve years (2014-2025) of secondary panel data drawn from Central Bank of Kenya Annual Supervisory Reports for Microfinance Banks, the Kenya Bankers Association's State of the Banking Industry Reports, and individual microfinance banks' published audited financial statements, covering the full census of Kenya's fourteen licensed deposit-taking microfinance banks. The study models financial access, financial usage, financial service quality and financial inclusion outcome (depth of outreach) as independent variables; portfolio quality (the non-performing loan ratio, inverse-scored) as a mediator; digital financial services (the share of transactions conducted through digital channels) as a moderator; and financial performance (return on assets, return on equity and profit before tax) as the dependent variable. This document presents the full introduction, literature review, methodology and data analysis chapters, together with verified secondary data spanning 2020-2023, including real, named bank-level Gross Assets, Total Deposits and Total Capital figures for all fourteen institutions in December 2021, a genuine illustrative cross-sectional regression computed from that real data (n=14, R²=0.962, p<0.001), the regression equations for the direct, mediated and moderated models, and a transparent roadmap for completing the bank-level panel required to estimate the full model.
🏷️ Keywords
📚 How to Cite:
Simeon Kiprotich Rugutt, Hilda Liagala Bengo,Dr. Lucy Wamugo , FINANCIAL INCLUSION, PORTFOLIO QUALITY, DIGITAL FINANCIAL SERVICES AND FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN KENYA , Volume 13 , Issue 8, August 2026, EPRA International Journal of Economics, Business and Management Studies (EBMS) , Pages: 201 - 209 , DOI: https://doi.org/10.36713/epra31283