EFFECT OF COST MANAGEMENT ON THE PERFORMANCE OF MICROFINANCE BANKS IN NAIROBI COUNTY, KENYA

Abstract

Microfinance banks play a critical role in Kenya's financial system by extending credit and savings services to low-income households and small and medium enterprises that remain outside the reach of mainstream commercial banks. Despite this importance, the sector has recorded persistent financial distress, with total assets, loan portfolios and profitability declining steadily between 2021 and 2024. This study examined the effect of cost management on the performance of microfinance banks in Nairobi County, Kenya. The study was anchored on the Resource-Based View. A cross-sectional survey design was adopted, targeting 98 departmental heads drawn from the 14 licensed microfinance banks headquartered in Nairobi County, using a census approach. Primary data were collected using a structured questionnaire based on a five-point Likert scale. A pilot study was conducted at Kenya Women Microfinance Bank (KWFT), Kiambu Branch, to test the validity and reliability of the research instrument, with cost management recording a Content Validity Index of 0.872 and a Cronbach's Alpha of 0.878. A response rate of 89.8% (n = 88) was achieved. Data were analysed using SPSS Version 30 through descriptive statistics, Pearson correlation and regression analysis. The findings revealed a moderate to strong level of cost management practice among microfinance banks (Mean = 3.6269, SD = 1.3163), with institutions performing best at implementing cost-reduction measures without compromising service quality but weaker at aligning budget allocation with strategic priorities. Cost management exhibited a moderately strong, positive and statistically significant correlation with performance (r = 0.553, p = 0.000), and regression analysis confirmed that cost management has a statistically significant positive effect on performance (B = 0.293, β = 0.195, p = 0.010). The study concludes that disciplined expenditure monitoring, variance review, and strategically guided resource allocation strengthen the performance of microfinance banks in Nairobi County. It is recommended that management strengthen the linkage between budgeting processes and strategic priorities by institutionalising periodic strategic budget reviews, and that regulators and industry bodies develop frameworks that embed cost discipline into strategic planning.