EFFECT OF EQUITY FINANCING ON THE LENDING PROPENSITY OF MICROFINANCE BANKS IN KENYA

Abstract

This study investigates the effect of equity financing on the lending propensity of Microfinance Banks (MFBs) in Kenya. Despite policy interventions, Kenya has experienced a marked decline in lending as a percentage of GDP from 35.22% in 2015 to 12.2% in 2023 posing economic risks, given the critical role of credit in driving over 75% of GDP. Existing literature has largely focused on commercial banks in developed economies, with limited evidence on how equity financing influences lending behavior in Kenyan MFBs. Anchored on the Bank Capital Channel Theory and Pecking Order Theory, the study employed a correlational research design using panel data from 10 purposively sampled MFBs over a nine-year period (2015–2023), yielding 90 observations. Secondary data were obtained from audited financial statements, and Moderated Multiple Regression (MMR) analysis was conducted after diagnostic tests confirmed compliance with classical regression assumptions. The findings reveal that equity financing has a significant negative effect on lending propensity (β = -0.421, p = 0.0001), indicating that MFBs with higher equity levels adopt more conservative lending strategies. The study concludes that while equity strengthens capital adequacy, excessive reliance may constrain credit access unless balanced by institutional growth. It recommends that MFBs build robust capital buffers, pursue strategic scaling through mergers or expansion and advocate for regulatory frameworks that balance capital adequacy with lending flexibility. These insights contribute to financial policy discussions and support the development of a more resilient and growth-oriented MFB sector in Kenya.