Effect of Financial Leverage on Stability Among Deposit-taking Microfinance Institutions in Kenya

Abstract

The study was undertaken to ascertain the effect of leverage on the financial stability of deposit taking micro-finance institutions in Kenya. To achieve the objective of the study, secondary data, concerning the study variables, was utilized which was obtained from published and audited annual reports. The response rate was 80% as the study could not collect all the panel data as targeted since four DT-MFIs were not yet established for the years 2012 and 2013. The study carried out descriptive and inferential statistics to achieve the objective of the study. Correlation and regression analysis was undertaken on the panel data where all the independent variables displayed a significant correlation against the dependent variable of the study. Financial leverage indicated a positive and significant correlation of 0.447 against stability. NPL indicated a weak negative and significant correlation of -0.238 against stability. Tax payment revealed a positive and significant correlation of 0.326 against stability while the size of the firm indicated a strong positive and significant correlation of 0.628 against stability. The R square was 0.426 implying that the coefficient of determination was 42.6 % which suggests that the independent variables in the model could account for only 42.6% of the changes in the dependent variable of the study. Adjusted R square recorded a value of 0.402, which was below R square to indicate that the model had elements that did not add value to it. The model indicated significance of 0.001 which was below 0.05. Therefore, the study rejected the null hypothesis and concluded that there is significant effect of financial leverage on stability of DT-MFIs. Financial leverage and size had significance effect on stability as their p-value was less than 0.05 while NPL and Tax payment indicated p value that was above 0.05 hence, were not-statistically significant. The model implies that a unit increase in financial leverage when size is constant will lead to an increase of 0.023 in stability of DT-MFIs. On the other hand, a unit increase in size will lead to an increase of 0.621 in stability when financial leverage is kept constant. The study therefore recommended increasing financial leverage for DT-MFIs as well as ensure they enhance and improve their growth. The study also recommended that these institutions should not incur extra costs in trying to manage NPLs. Similarly, the study also recommended duly payment of taxes, as tax payments had non-significant impact on financial stability but lack of tax payment would increase non-compliance risks that would jeopardize the licensing of the institution.