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.