Revisiting Funding Strategy-financial Performance Dynamics: The Moderating Influence of Firm Size in Kenya’s Microfinance Sector

The purpose of the study was to examine the moderating effect of firm size on the relationship between funding strategy and the financial performance of deposit-taking microfinance institutions (DT-MFIs) in Kenya. The study was informed by the Modigliani-Miller Theorem and Economies of Scale Theory. The positivist philosophy was adopted, which informed the adoption of a descriptive research design to source data from 13 DT-MFIs in Kenya. The study extracted annual secondary data (2013 – 2022) from the bank supervisory report by the Central Bank of Kenya (CBK). The data sourced was analysed based on a panel generalised least squares (GLS) model that adjusted for group heteroskedasticity, serial correlation and cross-sectional dependence. The panel regression analysis showed that the funding strategy had a significant effect on all proxies of financial performance of DT -MFIs in Kenya. Firm size was a positive moderator on the relationship between funding strategy and the financial performance of DT-MFIs as measured by ROE and Z-score. The research suggests that deposit mobilisation should be reinforced in conjunction with improved risk management, decreasing dependence on expensive wholesale funding, and increasing equity capital to boost profitability and stability. Additionally, it calls on DT-MFIs to aim for strategic growth and capital accumulation, while encouraging policymakers to facilitate consolidation, digital growth, and the establishment of more robust regulatory buffers to strengthen the resilience of the sector.