Effect of Capital Adequacy on Liquidity of Microfinance Banks in Kenya

Abstract

The study sought to assess the effect of capital adequacy on the liquidity of microfinance banks in Kenya. The capital buffer theory and liquidity preference theory were employed for the investigation. The study used an explanatory research design and a positivist worldview. The 13 Kenyan microfinance banks that were operational between 2012 and 2018 were the demographic that was targeted. The study used a census methodology and concentrated on all 13 MFBs in Kenya. The study used secondary data from published financial statements and Central Bank regulatory reports. Descriptive analysis and panel regression analysis was used to analyze the data. At a significance threshold of 0.05, the hypothesis was tested. The study discovered that adequate capital has a substantial impact on Kenyan microfinance banks' liquidity. Notably, higher capital held above the minimum requirement depletes the liquidity levels of banks; hence, managers need to strike a balance between capital levels and optimum liquidity levels. This, in turn, will allow the Microfinance Banks to carry out other liquidity functions without interruptions emanating from rising capital adequacy.