The effect of leverage on financial performance of microfinance institutions in Nakuru county
Abstract
The aim of this study was an attempt to determine the effect of financial leverage on
financial performance of microfinance institutions in Nakuru County. The sample
data was extracted from financial statements of seven licensed micro finance
institutions in Kenya as at 31st June 2013. Census was used in getting the information.
The study used secondary data since the nature of the data to be collected was
quantitative in nature. The study used secondary data sources of a five year period
from 2009-2013 based on the accessibility and availability of data. Data collected was
sorted, cleaned and coded and then entered into Statistical Package for Social science
for analysis. A multiple regression model was used to show the relationship between
the independent and the dependent variables. The model explains the relationship
between four variables namely: debt to equity ratio, portfolio to assets ratio and
operating expense ratio (Independent variables) with financial performance (the
dependent variable). The Pearson’s r for the correlation between the Debts divided
Equity ratio and ROA variables is 0.884. This means that there was a strong positive
relationship between the two variables. Since the Sig (2-Tailed) value is less than 0
.05. It was concluded that there is a statistically significant correlation between the
two variables at the 0.01 level. This means that there is a strong relationship between
the two variables. According to the regression analysis, the findings revealed that
66.3% is explained by the variables under the study meaning that the model is a good
predictor. Central banks of Kenya should encourage commercial banks to use
leverage in managing risks. This is because the relationship between operating
leverage and financial leverage is multiplicative rather than additive. Operating
leverage and financial leverage can be combined in a number of different ways to
obtain a desirable degree of total leverage and level of total firm risk. Future
researchers may extend study period and may also take all the deposit taking Sacco
that are regulated by SASRA. Researcher can also conduct comparative study by
taking data from deposit taking Sacco’s and Non deposit taking Sacco to check the
relationship between financial leverage and financial performance. The study was
limited to one county:Nakuru County and therefore the findings and recommendations
made on this study cannot be used to make generalization of other microfinance
institutions operating in the 47 counties in Kenya. It is therefore important for future
researchers to test the same variables on all the microfinance institutions in all the
counties then findings and conclusions can be made based on concrete facts and
evidence.
Citation
Masters of Business AdministrationPublisher
University of Nairobi