Turnaround Strategies, Employee Engagement and Financial Performance of Microfinance Banks in Nairobi County, Kenya
DOI:
https://doi.org/10.53819/81018102t2614Abstract
Microfinance banks play a vital role in advancing financial inclusion in Kenya, yet the sector has been in sustained decline, with negative returns on assets in every year since 2020, roughly a third of the loan book non-performing and operating costs exceeding operating income. Many banks have responded with turnaround strategies, but sector performance has continued to deteriorate, suggesting that the problem lies in how such strategies are executed. This study examined the mediating role of employee engagement in the relationship between turnaround strategies and financial performance of microfinance banks in Nairobi County, Kenya. Turnaround strategies comprised cost reduction, asset management, concentration and leadership change strategies, while employee engagement was operationalized as employee commitment, involvement in decision-making and staff motivation. The study was anchored on Strategic Renewal Theory and Transformational Leadership Theory and adopted a cross-sectional descriptive survey design. The target population was the top management of all 13 licensed microfinance banks, all headquartered in Nairobi County; one bank was used for the pilot study, leaving a census of 60 top managers in 12 banks, of whom 48 responded, a response rate of 80%. Primary data were collected using a structured questionnaire and analysed using descriptive statistics, Pearson correlation and Baron and Kenny's four-step mediation procedure, with the indirect effect tested using the Sobel test. Employee engagement was moderately high (mean = 3.75), although involvement in decision-making was the weakest-rated practice (mean = 2.71). Turnaround strategies had a significant total effect on financial performance (β = 0.875, R² = 0.765, p < 0.05) and a significant effect on employee engagement (β = 0.940, p < 0.05), while employee engagement significantly predicted financial performance (β = 0.870, p < 0.05). When both predictors were entered together, the effect of turnaround strategies fell to β = 0.359 but remained significant (p = 0.002), and the indirect effect was significant (ab = 0.766, Sobel z = 5.31, p < 0.001), indicating partial mediation. The study concluded that turnaround strategies influence financial performance largely through engaged employees, but that engagement in the banks is valued more than it is institutionalized. It recommends that microfinance banks adopt formal engagement policies and participation structures as part of their turnaround plans, and that the Central Bank of Kenya incorporate engagement indicators into the supervision of banks implementing turnaround plans.
Keywords: Turnaround Strategies, Employee Engagement, Financial Performance, Microfinance Banks, Strategic Renewal.
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