A survey of working capital financing policies among microfinance institutions in Nairobi

Abstract

Companies in different sectors in Kenya follow different working capital financing policies. The objective of this research study is to establish the dominant working capital financing policies among the microfinance institutions (MFIs) in Nairobi and the relationship between MFI’s working capital financing policies and profitability. The population of interest for the study is all the Microfinance institutions registered in Kenya by the central bank of Kenya. The secondary data is extracted from the audited financial statements of the MFI’s sampled. For each firm sampled annual data on the assets (split between current and non-current liabilities) and the profit after tax was collected for the period 2001 to 2006. The data collected is analyzed to determine the individual company’s annual working capital management financing policy as measured by the long-term financing of current assets (net assets) and also the profitability of the company. The annual working capital management financing policies and profitability were averaged using simple arithmetic mean to get the five year average for each of the company in the sample. The companies were then grouped into three categories depending on their working capital management financing policy. Simple regression analysis was done to establish the relationship between working capital financing policy and the profit after tax.

The results of the analysis showed that the commonly practiced working capital management financing policy among the MFI’s in Kenya is the aggressive policy. Further, the research findings show that there are no significant differences in profit after tax among companies that practice different working capital management policies. The regression analysis also showed that the working capital management financing policy explained only fifty three per cent of the variation in profit after tax.