Effect of Funding Structure on Financial Performance of Microfinance Banks in Kenya

Abstract

Literature has shown that firms have failed due to financial performance issues linked to funding structure with firms that adopt wrong funding structure mix experience reduction in their financial performance. The trade-off theory, pecking order theory, and Modigliani and Miller (M&M) theory were all used in this research. A descriptive survey design was adopted in this investigation. Paper’s target population was all the registered MFBs in Kenya between 2012 and 2021. According to CBK (2021) there were 14 registered MFBs in Kenya as at the year 2021. The investigation made use of secondary related sources on the study variables. A data capture sheet is used to obtain the information. The data was collected from CBK’s bank supervision report for the period between 2012 and 2021. Investigation employed descriptive and inferentially articulated methods. The study employed a multiple regression to establish the impact of predictors on dependent. This investigation made use of SPSS tool for for generation of statistics. The regression analysis was done to establish the effect of funding structure on financial performance. The study findings indicated that funding structure has a positive and significant effect on financial performance among MFIs (β = 0.158; P-Value < 0.05). It was also established that firm size has a positive and significant effect on financial performance among MFIs (β = 0.044; P-Value < 0.05). However, liquidity did not significantly determine financial performance of MFIs. Based on the findings that funding structure has a positive effect on financial performance of Microfinance banks in Kenya. This study recommends the MFIs to come up with avenues of attracting more equity from external investors. This is because an increase in equity ensures that MFIs have more funds to loan out hence increasing their interest income which ultimately increased ROA. In addition, more equity ensures that the MFIs have more funds to invest in other investments which can generate more income. There was hence a need to attract more equity through investors. Given the findings that firm size positively affects the financial performance of Microfinance banks in Kenya, the study recommends the management of MFIs in Kenya to invest towards increasing their firm size through increased assets. This is because bigger MFIs were established to perform better because of economies of scale. In addition, bigger MFIs are able to cushion themselves against bad loans in cases where there is a high rate of non-performing loans. Furthermore, bigger MFIs had more assets to liquidate in cases where there was an urgent need to invest or cushion the firm in cases of short term liabilities hence boosting performance.