EFFECT OF CONCENTRIC DIVERSIFICATION STRATEGIES ON PERFORMANCE OF MICROFINANCE BANKS IN NAIROBI COUNTY, KENYA

Abstract

According to the Central Bank of Kenya non-performing loans in the microfinance sector reached a staggering 19.8% in 2021, a sharp increase from the 15.6% reported in 2019, highlighting the strain on the sector's loan portfolios. This rising default rate has led to reduced profitability and has had adverse effect on the overall financial performance of these institutions. The inability of microfinance banks to adequately diversify their products and revenue streams has been cited as a major factor in their underperformance. It is against this backdrop that the study sought to determine the effect of concentric diversification strategies on the performance of microfinance banks in Nairobi County. Specifically, the study sought to assess the effect of concentric product diversification strategy, concentric market diversification strategy and concentric revenue diversification strategy on the performance of microfinance banks in Nairobi County. The target population was 63 employees in the 14 Microfinance Banks headquarters in Nairobi County, comprising heads of departments and sections since the target population was small the study adopted census technique to incorporate all the 63 targeted employees. The study adopted descriptive research design. The collection of data was done by use of structured questionnaires. The pilot study was conducted in two microfinance banks operating in Kiambu County. These are U & I Microfinance Bank and Kenya Women Microfinance Bank. Descriptive and inferential statistics were used to analyze quantitative data, and results were presented using tables. The findings indicated product diversification strategy positively affects performance of microfinance banks in Nairobi (r=0.596, p=0.000). In addition, the findings indicated market diversification strategy positively affected performance of microfinance banks in Nairobi (r=0.704, p=0.000). Finally, the findings indicated that revenue diversification strategy positively affects performance of microfinance banks in Nairobi (r=0.823, p=0.000). The study concluded that microfinance bank had modified their products to attract more customers over the last five years. The study further concluded that microfinance banks have been able to venture into different market segments in the society over the last five years. The study further concluded that microfinance banks offered fee-based services which lowered the rates of lending. From the study the researcher recommends that microfinance banks within Nairobi, should formulate a policy that encourages and rewards innovation within the organization.