Capital Structure and Financial Performance of Micro-Finance Institutions in Kenya
DOI:
https://doi.org/10.47941/ijf.1408Keywords:
Loan Financing, Retained Earnings, Deposit Financing, Firm Size, Financial PerformanceAbstract
Purpose: This research was envisioned to assess the influence of the capital structure on ROE of Micro-financial institutions in Kenya. The research was in search for resolving the following problem; is there a connection between the composition of capital (loan, shareholder's equity, retained earnings and deposits) and the viability of MFIs? If the firm size has an influence on ROE? The study was motivated by the following capital structure theories, which are the theory of pecking order, Trade-off theory and the theory of Marketing timing.
Methodology: To define the independent variable, the researcher used a correlation research design. The target demographic of the research was all 14 successful microfinance companies as recognized by the Kenya Microfinance Act as of 2020. The research therefore represented a census survey with a period of 5 years (from 2016-2020). The study's research model consisted of the independent variable loans, shareholder's equity, retained earnings and deposits and the size of the firm as a moderating variable, determined by the firm's total asset value, and the following ratios as dependent variables: return on equity. To analyze the results, EViews was used. There was descriptive and inferential statistics execution. Diagnostic results were computed before the data analysis.
Findings: The results were presented in the form of tables. The inferential statistics with the moderating variable revealed that loan financing has statistical negligible sway on the financial return of MFIs (p=0.9832>0.05). Shareholders equity financing was found to have a statistically significant influence on financial performance of MFIs (p=0.0047<0.05). Retained earnings financing was found to have a statistically significant influence on financial performance of MFIs (p=0.0016<0.05). Deposit financing was found to have a statistically insignificant influence on financial performance of MFIs (p=0.2168>0.05).in this study.
Unique contribution to theory, practice and policy: The study suggested that MFIs should strike a balance benefits and costs of debt arising thereof in line with the Trade-off theory, fast growing MFIs to utilize more retained earnings in capital structure, more profitable businesses use less shareholder's equity in capital structure mix and finally positive correlation on deposits indicating similar correlation is likely to exist with financing capital structure. Thus MFIs may consider reviewing these measures so as to enhance performance to serve the low-income earners better in improving the economy. Further studies can be done based on other performance measures like ROA, EPS,Net Interest Margin. The study used a correlation research design for five-year period from 2016 to 2020. Therefore, this study can be replicated using a different methodology and covering a longer period like ten year.
Downloads
References
Abdikadir,M.N. (2020). The effect of equity financing on financial performance of SMEs in Garissa County, Kenya.
Abor. (2005). The Effects of Capital Structure on Profitability:An Empirical Analysis of Listed Firms in Ghana. The Journal of Risk Finance, 6(5), 438-445.
Akingunola, R. O., Olawale, L. S., & Olaniyan, J. D. (2017). Capital structure decision and firm performance: Evidence from non-financial firms in Nigeria. Economica, 13 (6), 351-364.
Akintoye,I.R. (2017). Efficient market hypothesis and behavioral finance.A review of literature. Journal f Social Science, 7(2), 7-19.
Allen, D. (1993). The pecking order hypothesis: Australian evidence. Applied Financial Economics, 3(2),101-112.
Aman,S. (2011). Equity ownership and financial performance. Journal of Economics & Behavioral Studies, 2(4),131-137.
Aziz,S. & Aldas,U. (2019). E ffects of debt financing on Firm performance; A Study on non-financial sectors of Pakistan. Open Journal of Economics and Commerce, 2(1),8-15.
Baker, M., & Wurgler, J. (2002). Market timing and capital structure. Journal of Finance, 57(1), 61-81.
Baker,G., & Martin,L. (2017). On the debt capacity of growth options. Journal of Business, 79,35-59.
Bogan,V.L. (2008). Microfinance institutions: does capital structure matter?. Available in SSRN , 1144762.
Bui, D. T. (2017). Impact of capital structure and working capitalon the financial performance of small and medium-sized enterprises.
Caramela,I.K & Sammi,I.R. (2018). Contribution of microfinance services on poverty reduction in Rwanda. International Journal of Social Sciencea & Management Review, 3(1), 66-98.
CBN. (2019). Uncertainities in the global financial,economical and political environment.
Central Bank of Kenya. (2017). Annual bank supervision report. Nairobi.
Central Bank of Kenya. (2018). Annual report of the bank supervision. Nairobi.
Central Bank of Kenya. (2019). Annual bank supervision report. Nairobi.
Central Bank of Kenya. (2020). Bank Supervision Annual Report. Nairobi.
Chai. (2011). The Impact of Capital Budgeting Technique on Financial Performance of Courier Companies in Kenya. Research Project of University of Nairobi.
Dang, Y. T., Bui, N. T., Dao, A. T., & Nguyen, H. T. (2019). Impact of capital strucuture on firmperformance: Empirical evidence from listed food and beverage companies in Vietnam. International Journal of Economics, Commerce and Management, 7 (2), 567-577.
Dao, T. T. B.; Ta, T. D. N. (2020). A meta-analysis: capital structure and firm performance. Journal of Economics and Development, 22(1), 111-129.
Duru, I. U., Ehidiamhen, P. O., & Chijioke, A. N. (2018). Role of entrepreneurial orientation in the performance of small and medium enterprises. Asian Journal of Economics, Business and Accounting, 6 (1), 1-21.
Edom, G. O., & Aganyi, A. A. (2015). Assessing the impact of retained profit on corporate Performance: Empirical Evidence from Niger mills company, Calabar-Nigeria. . International Journal of Business & Management , 3(10), 650.
Gul, S., & Cho, H. R. (2019). Capital Structure and Default Risk:Evidence from Korean Stock Market. . Journal of Asian Finance Economics and Business , 6(2), 15-24.
Hassan, L. S., & Holmstedt, M. (2016, May 27). Capital structure and firm performance: Did the financial crisis matter? . A cross-industry study.
Irene,K.N,Kimani,E.M,& Samuel,K. (2017). Equity financing and financial performance of SMEs in Embu town,Kenya. Internation Academic Journal of Economic & Finance, 2(3),74-91.
Karthika & Karthikeyan. (2015). Role of Micro Finance in Economic Development. A theoretical Perspective.
Khan,B., & Jain,G. (2017). A state-prefernce model of optimal financial leverage. Journal of Finance, 28(4),911-927.
Khrawish, H. (2018). Determinants of commercial banks performance in Jordan. International Research Journal of Finance and Economics, 19-45.
Kihinde, F. (2012). Capital Structure and firm value; Empirical evidence from Nigeria. International Journal of Business and Social Science., (3) 1-30.
Kirmi, P. N. (2017). Relationship between capital structure and profitability: Evidence from listed energy and petroleum companies in Nairobi security exchange. Journal of Investment and Management , 6 (5), 97-102.
Kirmi,P.N. (2018). Relationship between capital structure a.nd profitability: Evide from listed energy and petroleum companies in Nairobi stock exchange. Journal of Investment & Management, 6(5),97-102.
Mwongeli,W.M., & Ariemba,J. (2018). Effect of capital structure of financial sustainability on deposit-taking microfinance institutions in kenya. Business,Management & Economics Research, 4(1), 1-10.
Myers, S. & Majluf, N. (1984). Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13,187-221.
Myers,S. & Majluf,N. (1984). Corporate Financing and Investment Practices when Firms have Information that Investors do not have. Journal of Financial Economics, 13(5), 187-221.
Nandan,R. (2010). Management accounting needs of companies and the role of professionalaAccountant. A Reviewed Research Agenda. JAMAR, 8(1), 65-78.
Nassar, S. (2016). The impact of capital structure on Financial Performance of the firms: Evidence From Borsa Istanbul. Journal of Business & Financial Affairs , 5 (2), 1-4.
Nenu, E.A., Vintila, G., & Gherghina, S.C. (2017). The impact of capital structure on risk and firm performance: Empirical evidence for the Bucharest stock exchange listed companies. International Journal of Financial Studies , 6(41), 1-29.
Nguyen, T. H., & Nguyen, H. A. (2020). The Impact of Capital Structure on Firm Performance: Evidence from Vietnam. . Journal of Asian Finance, Economics and Busines, 7(4), 97-105.
Oayyun, N., & Noreen, U. (2019). Impact of capital structure on profitability : A comparative study of Islamic and conventional banks of Pakstan. Journal of Asian Finance,Economics, & Business, 6(4), 65-74.
Salim & Yadav . (2012). Capital Structure and Firm Performance :Evidence from Malaysian Listed Companies . Procedia-social and Behavioral science, 65,156-166.
Shen, B. . (2017). An empirical study on the relationship between capital structure and corporate performance. European Journal of Accounting, Auditing and Finance Research , 5 (11), 36-57.
Ulzanah.A.A & Murtaqi.I. (2015). The Impact of Earnings per share,debt,equity and current ratio towards the profitability of companies listed in LQ45 from 2009 to 2013. Journal of Business and Management , 4(1),18-23.
Uremadu, S. O., & Onyekachi, O. (2019). Impact of capital structure on corporate performance in Nigeria: A quantitative study of consumer goods sector. Current Investigations in Agriculture and Current Research , 5 (4), 697-705.
Wen,C.L. (2017). Trade-off theory of capital structure: Evidence from estimations of non-parametrics and semi-parametric panel fixed effect models. Journal of Investment Management and Financial Innovations, 14(1), 115-123.
Wen,N. (2019). Ownership structure and banking performance. Prentice Hall: IBM.
Woldemariam, B. (2016). The impact of capital structure on financial performance ofcommercial banks in Ethiopia. . Global Journal of Management and Business Research, 16 (8).
World Bank. (1999). World Bank Annual Report.
World Bank. (2013 & 2014). World Bank Annual Report.
Zachary,M.G,James,M.K,; James,N.M. (2019). Effect of equity on financial performance of selected companies in Nairobi security exchange in kenya. International Journal of Business & Law Research, 7(1),1-24.
Zeitun, R., Tian, G., & Keen, S. (2007). Microeconomic determinants of corporate performance and failure: evidence from an emerging market the case of Jordan. . Corporate Ownership & Control , 5(1), 179-194.
Downloads
Published
How to Cite
Issue
Section
License
Copyright (c) 2023 Irene Atsiech Kwena, Dr. Thomas Githui Ph.D., Dr. Allan Kihara Ph.D.
This work is licensed under a Creative Commons Attribution 4.0 International License.
Authors retain copyright and grant the journal right of first publication with the work simultaneously licensed under a Creative Commons Attribution (CC-BY) 4.0 License that allows others to share the work with an acknowledgment of the work's authorship and initial publication in this journal.
