Effect of Equity Financing on Profitability of Deposit Taking Microfinance Banks in Kenya

Abstract

This study sought to establish the effect of equity financing on profitability of deposit taking microfinance banks in Kenya. It was based on correlational research design. This study targeted 14 deposit taking microfinance banks in Kenya between 2018 and 2022. This study adopted the use of secondary data collected from the bank supervision reports downloaded from the CBK website. The data was collected using a data collection sheet. The data from the field was analysed using descriptive and regression statistics. This study diagnosed the analytical model through normality, heteroscedasticity, and Multicollinearity tests. The researcher tested the significance of the model using F-statistics generated through ANOVA. From the descriptive statistics, profitability in terms of return on equity showed a mean of -26.38% between 2018 and 2022. On the other hand, equity financing averaged at 15.10%, Firm size averaged at a log of 20.90; asset quality average NPL ratio was 77.88% while capital adequacy had a mean of 32.97%. The model summary showed a strong relationship existed between predictors (equity financing, size of firm, asset quality and capital adequacy) and profitability. The R square value was 0.551. The study concluded that equity financing has a negative effect on profitability of deposit taking microfinance banks in Kenya. It also concluded that firm size in terms of assets and asset quality in terms of NPL ratio has a positive effect on the profitability of deposit taking microfinance banks in Kenya. On the other hand, a conclusion was made that capital adequacy has a negative effect on the profitability of deposit taking microfinance banks in Kenya. The study recommended that management of deposit taking microfinance banks in Kenya reduce their equity financing in the capital structure. It was also recommended that the management purchase more assets and increase the loan loss provision ratio for increased profitability. The study further recommended a reduction in the core capital for increased income levels, hence, increased profits. Future studies are recommended based on other factors influencing profitability, other measures of variables, different periods, quarterly/semi-annual data, and primary data.