Determinants Of Capital Structure Of Microfinance Banks In Kenya

Abstract

Capital structure of microfinance banking institutions is key to the economy but has limited literature on the topic. There is no clear method on how microfinance should choose their optimal debt to equity financing ratio. In Kenya, microfinance banks have always struggled due to insufficient funds to advance to their members. This cause for this falls on both the lender and the MFBs as well. Despite taking insurance covers to cushion against losses, capital structure is vital in ensuring these institutions continue to operate as going concern. This research aim was to examine determinants of capital structure of microfinance banks in Kenya. It adopted descriptive method which aimed at addressing the current affairs of situation. The data was collected from 13 microfinance banks hence census technique was applied and study collected a five-year period data from 2014 to 2018. Regression and correlation analysis were used to establish correlation linking variable. The study managed to obtain complete data from 9 microfinance banks which had been in operation for the considered study period hence 69.2% response deemed sufficient for research. The study found an existence of a week inverse correlation linking firm age and leverage while correlation linking firm size and leverage is strong and direct. The results established correlation linking profitability to leverage was inverse and insignificant while an inverse correlation between assets tangibility and leverage respectively. The finding further revealed correlation linking liquidity to leverage was negative and significant whereas an inverse correlation linking growth and leverage while correlation linking loan and advances and leverage was negative but respectively. The study colluded that firm size, assets tangibility, liquidity and growth significantly affected capital structure. The study recommended that the management of large microfinance banks should use more debt to finance any investment opportunities as they possess adequate assets which they can use a collateral. The study also recommended that microfinance banks should have adequate liquidity to pay off their debt obligations (principal and interest payments).