| dc.description.abstract | Capital structure is a financial tool that helps to determine how firms choose their
funding structure. Most DTMFIs in Kenya started off as NGOs and had built
significant supply side competencies, as such, funding structure had no relevance.
However, with growth and commercialization, MFIs are spinned off to become fully
independent, the puzzle of funding structure that will ensure sustainability and
profitability becomes relevant. In this study, an attempt has been made to fill in the
existing knowledge gap by determining effects of funding structure on the financial
performance of Deposit Taking Micro Finance institutions in Kenya. This study
analyzed the funding structure and financial performance of Deposit taking
microfinance institutions in Kenya for the period 2011 to 2012. For the purpose of
this study, the data was extracted from the published institution’s annual audit reports
and CBK’s banks supervision annual reports for the 2 years under examination. This
study used descriptive statistics to explain the main features of a collection of data in
quantitative terms while correlation and linear regression analysis are used for
analyzing the data. Financial performance was measured using return on assets while
capital structure of DTMFIs was measured using customer’s deposits and borrowings
divided by total assets. The results revealed there is positive relationship between
funding structure and financial performance. The study concluded that increase in
customer deposits and assets in DTMFIs would significantly improve financial
performance of DTMFI while borrowing significantly decreases DTMFIs financial
performance. Further this study concluded that DMFIs preferred source of fund was
customer deposit and increase in asset, while borrowing generally has decreased in
importance in the DMFI funding structure as it led to low profitability. From the
findings the study concludes that that most of DTMFIs in Kenya were using borrowed
funds but incrementally utilizing more of deposits as financial performance improve.
Use of customer deposits has given the deposit-taking microfinance institutions
(DTMFIs) headroom to cut their reliance on expensive borrowings as increased
customer deposits provide an alternative source of cash. A proportionate increase in
deposit base as a percentage of total assets typically lead to an overall lower cost of
funds hence high profit margin. The study recommend management in DTMFIs
should focus on enhancing Customer Deposits and assets as a source of funds as there
existed a positively and strongly correlation between deposit and ROA. The results of
the study were valuable to DTMFI organizations in Kenya in getting reliable insights
on relationship between profitability and funding structure. DTM managers agrees
that while mobilizing customer deposits is slower than they would like, they expect
CBK and Treasury to change rules to allow DTMs attract big depositors. The findings
indicated that a proportionally higher deposit as a percentage of total assets is
associated with improved profitability, assuming that the deposits program is cost
efficient. Although borrowings had negative significantly correlation to ROA, this
study calls for the development of appropriate regulatory policies that enable DTMFIs
to have access to long-term debt which may in turn improve their profitability. This
may include relaxation of their listing requirements in the capital market | en |
