The Mediating Effect of Psychological Empowerment on the Relationship between Transformational Leadership and Staff Retention in Microfinance Institutions in Kenya

Retention of the desired staff in microfinance institutions has remained a major challenge as depicted from extant literature. It is often associated with inappropriate leadership deployed in these institutions among other antecedents. The current study, therefore, set out to establish the effect of transformational leadership on staff retention in microfinance institutions in Nairobi City County, Kenya, as well as the mediating effect psychological empowerment on the relationship between transformational leadership and staff retention in microfinance institutions in Nairobi City County, Kenya. The study was guided by Transformational Leadership Theory, Leader-Member Exchange Theory, Social Exchange Theory, and Resource-Based View Theory and founded on the positivism philosophy. Descriptive and explanatory research designs were adopted to guide the study. A sample of 298 respondents was obtained from 12 microfinance institutions in the Nairobi City County, Kenya, through census method for data collection. The unit of analysis was the head offices of the 12 microfinance institutions, while the unit of observation was the senior management level, middle management level and lower management level. Data was collected using structured questionnaires and analysed using descriptive and inferential statistics. The hypotheses were tested at the 5% significance level. The study established that transformational leadership was a significant predictor of staff retention, and that this relationship was partially mediated by the psychological empowerment. The study recommends that the microfinance institutions management should align transformational leadership practices with the strategic goals set for staff retention and emphasize on psychologically empowering strategies for their staff.