The Effect of Financial Structure on the Financial Performance of Microfinance Banks in Kenya

Abstract

In Kenya, microfinance institution plays a major role in poverty eradication as it lends to low income earners. The microfinance industry in Kenya is growing at a very rapid rate. However, Most of the microfinance banks have posted adverse development even though the sector is well established. Additionally, microfinance banks in Kenya face huge challenge due to inadequacies of retained earnings and exorbitant interest rates charged by commercial banks, which affect their funding structures. The objective of this study was to determine the effect of financial structure on the financial performance of microfinance banks in Kenya. The study explored the Modigliani and Miller irrelevance theory, the pecking order theory and the trade off theory will be used as the underlying theories for the study. The study adopted a descriptive design carried out a census of the 13 microfinance banks in Kenya as 31st December 2016 and managed to obtain completed data from 9 microfinance out of the targeted 13. This generated a response rate of 69.23%, which was regarded to be sufficient. The collected secondary data was summarized using descriptive statistics and then analyzed using Karl Pearson Correlation and multiple regression analysis using the Statistical Software for Social Sciences. The study found an insignificant negative relationship between financial structure, capital adequacy and financial performance of microfinance banks. The research also found a significant positive relationship between assets quality and the performance of microfinance banks in financial terms. The findings further revealed that liquidity and management quality had a significant and negative relationship with financial performance but an insignificant positive relationship between earnings quality and microfinance banks financial performance. The study concluded that the financial structure adopted by microfinance banks in Kenya does not influence their performance in financial terms. The study recommended that microfinance banks should have an optimal financing mix to ensure that their going concern is assured at all times.