The Relationship Between Off Balance Sheet Financing and Financial Sustainability of Microfinance Banks in Kenya

Abstract

Off-balance sheet financing is one of the major developments in current financial markets, which are engaged by banking institutions. Financial institutions engagement in traditional banking has been shrinking whereas the OBS activities have been growing. It is argued that off-balance sheet activities play an important role in helping the financial institutions to hedge their long-term financial assets in the on-balance sheet and increasing the bank’s profitability, while keeping the details of these earnings off from the balance sheet of the commercial banks. For financial institutions including microfinance banks, the expansion toward OBS businesses allow them to downsize their on-balance sheet items by generating additional fee income to offset size reduction of interest rate margins generated from banks’ granting loans. The study sought to determine the relationship between off balance sheet financing and financial sustainability of microfinance banks in Kenya. The study employed a descriptive research design and the population of the study was made up of the thirteen microfinance banks in Kenya which are regulated by the central bank as at 31stDecember 2017. This study collected secondary data from the microfinance banks financial statements for a period of five years from the year 2013 to 2017. The study used regression analysis to determine the relationship between the dependent and independent variable and correlation analysis to assess the degree to which two or more variables are associated with or related to each other. The study results revealed that the relationship between off balance sheet financing and financial sustainability was negative and statistically insignificant and that there was a positive and significant relationship between firm size and financial sustainability of microfinance banks in Kenya. The findings revealed that there was a positive and statistically insignificant relationship between liquidity and financial sustainability of microfinance banks and that capital adequacy had a positive and significant relationship with financial sustainability of microfinance banks in Kenya. The study concluded that off balance sheet financing and liquidity does not influence financial sustainability of microfinance banks but firm size and capital adequacy significantly affect microfinance banks sustainability.