article · East African Journal of Business and Economics
Microfinance institutions support financial inclusion for low-income households and small businesses, but they face challenges from decreasing profitability, escalating operating costs, credit risks, and declining donor support. An examination of microfinance institutions operating in the North Rift region of Kenya evaluated how widening revenue sources affects financial outcomes. Using primary questionnaires distributed to managerial staff alongside secondary financial records from the Central Bank of Kenya, researchers conducted descriptive and linear regression analyses. The results indicate a strong, positive link between diversifying income and financial performance, with diversification accounting for 57 percent of the variance in institutional financial results. Broadening revenue streams demonstrates a statistically significant positive effect on organizational performance. Consequently, expanding beyond conventional lending revenues into non-interest activities and novel financial services helps microfinance institutions build operational resilience and secure long-term sustainability.
Microfinance institutions are essential for delivering credit to underserved populations and small businesses. When donor funding falls and operational costs rise, these lenders risk insolvency. Demonstrating that alternative revenue streams directly improve financial stability offers leaders practical evidence to protect services that advance financial inclusion across developing regions.
The findings offer immediate, applied insights for microfinance managers and financial service innovators seeking to design non-interest generating products and diversified service portfolios. As an empirical study based on established institutional data, the insights are ready for operational adoption by microfinance institutions aiming to restructure their business models and reduce dependence on conventional credit margins.
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Microfinance institutions (MFIs) play an important role in promoting financial inclusion and supporting low-income households and small enterprises; however, their capacity to sustain these functions depends on strong financial performance. Declining profitability, rising operational costs, credit risks, and reduced donor funding have increased the need for MFIs to broaden their income sources. This study examined the influence of income diversification on the financial performance of MFIs in North Rift, Kenya. The study adopted a positivist research philosophy and an explanatory research design. Primary data were collected from management-level employees of MFIs using structured questionnaires, while financial performance was measured using secondary data obtained from CBK. Data were analysed using descriptive statistics and linear regression analysis. The findings established a strong positive relationship between income diversification and financial performance (R = 0.756). Income diversification explained 57.0% of the variation in the financial performance of MFIs (Adjusted R² = 0.570), and the regression model was statistically significant (F = 301.87, p < 0.05). The regression coefficient further showed that income diversification had a positive and statistically significant effect on financial performance (β = 0.756, p<0.05). The study concludes that income diversification is an important strategy for enhancing the financial performance and sustainability of MFIs. The study recommends that MFI managers strengthen and broaden income streams through innovative financial products and sustainable non-interest income-generating activities to reduce dependence on traditional lending income and enhance institutional resilience
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DOI: 10.37284/eajbe.9.3.5642
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