Working Capital Management and Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Abstract

The researcher looked into the effect of working capital management on financial performance of deposit taking microfinance institutions (DTMFIs) in Kenya. It was based on trade-off theory, operating cycle theory and Miller-Orr model. The descriptive-correlational research design was used on 14 DTMFIs in Kenya that existed between 2019 and 2023. Through data collection schedule, researcher gathered annual unbalanced panel secondary kind of data from bank supervision reports from the CBK website. Descriptive and regression analysis was done. This study adopted an unbalanced panel regression model for analysis. From the model, working capital management displayed a positive regression coefficient (β=0.925; p=0.003) indicating a positive effect similar to capital adequacy (β=0.065; p=0.009). On the other hand, non-performing loans had a negative effect on financial performance (β=-0.171; p=0.000). However, capital structure as measured by debt ratio indicated a positive but insignificant effects on financial performance (β=4.651; p=0.242). The study concluded that working capital management and capital adequacy have a positive effect on financial performance of DTMFIs in Kenya. It also concluded that non-performing loans have negative effects on financial performances of DTMFIs in Kenya while capital structure has no significant effects on financial performances of DTMFIs in Kenya. Researcher recommends that DTMFIs maintain an appropriate working capital ratio; reduce default rates; optimize their capital structure; and maintain a strong capital base for improved financial performance. Further research is recommended similar researches based on other firms, other factors, different measures of variables and balanced semi-annual or quarterly data.