The effect of capital requirements on the financial performance of deposit taking MFIS in Kenya

Abstract

The objective of this study is to establish the effect of capital requirements on the financial performance of deposit taking micro finance institution in Kenya. For a long time, financial performance has been perceived only through its ability to obtain profits. This changed over time, today the concept of performance having different meanings depending on the user perspective of financial information. Managers are interested in the welfare and to obtain profit, because their work is appreciated accordingly; owners want to maximize their wealth by increasing the company’s market value (profit); current and potential shareholders perceive performance as the company’s ability to distribute dividends for capital investment, given the risks they take; commercial partners look for the solvency and stability of the company; credit institutions want to be sure that the company has the necessary capacity to repay loans on time (solvency); employees want a stable job and to obtain high material benefits; the state seeks a company to be efficient, to pay its taxes, to help creating new jobs. This study took on a descriptive survey research design. This was a descriptive study where the researchers gathered data from the published financial statements of Deposit Taking Microfinance institutions in Kenya on Capital requirement. The target population is the 9 microfinance institutions which are involved in deposit-taking. The study used secondary data which were obtained from financial statements of the Deposit Taking Microfinance institutions (DTMs) in Kenya. Data was coded and thereafter analyzed using Statistical Package for Social Sciences (SPSS) program and presented to give a clear picture of the research findings at a glance. Results were presented in tables and charts. Correlation and regression analysis was used to establish the association and effect of independent variables and the dependent variable. The study findings indicated that as a result of the uptake of deposits by the DTMs, there was an increase in the value of loans outstanding, total assets of DTMs, as well as the profit and shareholders’ equity of the DTMs. The study also established that the profit of DTMs did not increase greatly immediately after transformation period as a result of the costs of transformation. The study recommends that comprehensive impact analyses should be conducted prior to implementation of new regulations in the financial sector particularly micro finance institutions. The impact analyses help the Central Bank of Kenya to come up with effective policy reforms that will lead to better performance of financial institutions.