EFFECT OF CAPITAL STRUCTURE ON PERFORMANCE OF MICROFINANCE INSTITUTIONS: A CASE OF DEPOSIT TAKING MICROFINANCE INSTITUTIONS

Onyinkwa Steve Omare

Abstract


Abstract: Most DTMFIs in Kenya started off as NGOs and had built significant supply side competencies, as such, funding structure had no relevance. However, with growth and commercialization, MFIs are spinned off to become fully independent, the puzzle of funding structure that will ensure sustainability and profitability becomes relevant. The main objective of this study was to investigate on the effect of capital structure on the performance of microfinance institutions with a case of taking microfinance institutions. The study also sought to determine the effect of debt to equity ratio, debt to asset ratio, total debt ratio and customer deposits on the performance of microfinance institutions in Kenya. This study used a descriptive research design. The target population for this study constituted of 8 Deposit Taking Microfinance institutions in Kenya. Census method was used to select all the 8 DTMs in Kenya. This study used cross-sectional data, where all the MFIs were observed at the same point of time (2010-2014). The research concentrated on secondary data using annual reports of the relevant Deposit Taking Microfinance institutions. The study made use of both descriptive and inferential statistics. In relation to descriptive statistics the study used frequency distributions, percentages, measures of central tendency (mean) and measures dispersion (Standard deviation) to summarize the data. The study also used correlation and multivariate regression analysis to examine the magnitude of the influence of the independent variable on the respective dependent variables. From the results, the study found that there is a positive relationship between debt to equity ratio and the performance of microfinance institutions in Kenya. The study also established that debt to asset ratio, total debt and customer deposits and the performance of microfinance institutions in Kenya. The study also found portfolio at risk influences the performance of microfinance institutions negatively. The study recommends the development of appropriate policies to enable MFIs to have access to debt to enhance their operations. In addition, the Nairobi Security Exchange should have a look at their listing requirements and work towards designing mechanisms that would enable MFIs to get listed and to offer them the opportunity to access equity capital.

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