Cash Reserves, Capital Structure, and Profitability: An Analysis of Liquidity Risk Management in Public Limited Microfinance Institutions in Rwanda
DOI:
https://doi.org/10.47941/ijf.3725Keywords:
Liquidity Risk Management, Cash Ratio, Equity Capital, Return on Assets, Microfinance Institutions, Financial PerformanceAbstract
Purpose: The purpose of this study was to investigate the influence of liquidity risk management on the financial performance of microfinance institutions in Rwanda. This research focused on the relationship between the Cash Ratio (CAR) and Equity Capital to Total Assets (ECTA) on Return on Assets (ROA), with the Lending Rate (LR) and Inflation Rate (IR) acting as control variables.
Methodology: A quantitative method was applied for this research, based on a panel data model. The information needed was derived from the financial statements of fifteen licensed microfinance institutions that kept steady records of their finances in Rwanda. The panel data estimation techniques used included Fixed Effects and Random Effects models. The Hausman test was applied to choose the right estimator.
Findings: It has been found that Cash Ratio has an impact on financial performance at β = 0.049 and p = 0.011, and Equity Capital/Total Assets also have a similar impact at β = 0.281 and p = 0.034. The results above imply that if the MFIs have sufficient liquidity and capitalization, then they would perform well financially. It was found out from the study that lending rate influences profitability moderately, but inflation does not have any impact on the financial performance. Also, it has been found that the combined influence of liquidity risk management indicators impacts profitability significantly.
Unique Contribution to Theory, Policy and Practice: This paper offers practical evidence from the microfinance sector in Rwanda, which has been ignored in the previous studies. This work also supports the theory in that it stresses the importance of having proper liquidity and capitalization in improving organizational stability and profitability. For the purpose of policy, the results of this research are useful for the regulators and policymakers because they highlight the importance of developing an appropriate framework for liquidity and capital adequacy among the microfinance institutions.
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Copyright (c) 2026 NIYIBIZI François Xavier, Prof. GWAHULA Raphael, Dr. ABAYO Abdiel
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