Abstract: The effect of bank-specific internal factors on the asset quality of deposit-taking microfinance banks in Kenya is the central focus of this research, with the individual objectives involving determining how asset quality was influenced by capital adequacy, leverage, liquidity, and bank size. The study's central premise was based on the agency, moral hazard, and institutional theories. The study's target population was 14 deposit-taking microfinance banks in Kenya, with each bank's panel data collected from their audited reports for the years 2019 to 2023. Longitudinal design was the most ideal given the balanced panel data of the banks. Panel data regression was used to determine the causality between the predictor and response variables. Correlation results showed that liquidity (r= - 0.289, p = 0.015 < 0.05), bank size (r = - 0.339, p = 0.004 < 0.05) and capital adequacy (r = - 0.391, p = 0.000 > 0.05) were negatively correlated with asset quality, but leverage (r = 0.316, p = 0.007) had a positive correlation with asset quality. Hypotheses results indicated that liquidity (p = 0.024, B = - 1.548) and bank size (p = 0.011, B = - 2.232) exerted negative and significant influences on asset quality. On the other hand, leverage (p = 0.027, β = 1.052) and capital adequacy (p = 0.002, B = 0.2587) exerted a positive and significant effect on asset quality. The study recommends that the management of DTM banks ensure steady profitability and controlled non-performing loans during phases of rapid growth through credit monitoring. Further, bank management should accumulate more leverage up to the optimal leverage position to lower the agency cost between shareholders and stockholders.