The Relationship Between Funding Structure and Financial Performance of Micro-finance Institutions in Kenya

Abstract

This study was carried out with the purpose of establishing the relationship between funding structure and financial performance of Microfinance institutions in Kenya. According to Hartarska (2005) microfinance is the provision of small scale financial services to low income or unbanked people while funding structure is the mix between equity and debt and it attempts to explain the mix of securities and financing sources used by corporations to finance real investment (Myers, 2006). MFIs in Kenya are registered into three different tiers; deposit taking institutions such as banks, credit only non deposit taking institutions and informal organizations supervised by an external agency other than the government. The objective of the study was to determine the relationship between funding structure and financial performance of microfinance institutions in Kenya. To carry out the study, the researcher adopted a descriptive research design. The target population in the research was 56 microfinance institutions registered and operating in Kenya. A sample of 25 was obtained from this population as a representative of the whole population. Secondary data obtained from the MIX market and annual report of the sampled microfinance institutions was used. The study was done over a period of 5 years i.e. between 2009 and 2013.Data analysis was done using SPSS and data findings presented using figures and tables. Multiple correlation analysis was used to determine the relationship between the variables under study. The study established that the funding structure employed by microfinance institutions affects the financial performance of the firm. Debt to equity ratio has a negative correlation with financial performance meaning the more debt a firm employs in financing its operations the inferior financial performance it registers. Deposits to assets ratio has a positive correlation with financial performance implying that the more deposits a microfinance institution accepts the higher the financial performance. Loan portfolio has a strong positive correlation with financial performance meaning, a small increase in loan portfolio will lead to a higher increase in the financial performance.