Microfinance banks have been experiencing increased cases of loan default, which is a hindrance to their primary objective of supporting low-income households. Therefore, this study sought to determine the effect of internal factors on the level of non-performing loans among deposit taking microfinance banks in Kenya. The precise goals were to ascertain how Kenyan deposit-taking microfinance banks' levels of capital adequacy, asset quality, management competence, earning capacity, and liquidity influenced the proportion of non-performing loans. The adverse selection and moral hazard theories served as the study's foundation. The explanatory research design was used in this study. 13 CBK-regulated microfinance banks made up the study's sample. The study used secondary panel data that covered the years 2015 through 2021. Both descriptive and inferential statistics were used to analyze the data. The results showed that the level of nonperforming loans was positively and significantly influenced by managerial skill. The level of non-performing loans was significantly and negatively impacted by liquidity. The level of nonperforming loans was negatively but insignificantly impacted by capital sufficiency, asset quality, and earnings potential. The study concluded that management capability of microfinance banks is unable to recognize and respond to financial challenges such as non-performing loans. The study came to the additional conclusion that microfinance institutions with high liquidity levels can control the level of non-performing loans. The study also found that capital adequacy, asset quality, and earnings capacity had a little impact on the level of non-performing loans. According to the study, management of microfinance institutions should improve their management skills. By lowering operating costs and raising operational profits, this can be accomplished. The report also suggests that microfinance bank management should improve their liquidity ratio. This can be achieved through control of overhead expenses, disposal of unnecessary assets, and renegotiation of debt obligations.

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