The Relationship Between Financial Structure And Financial Performance Of Microfinance Banks In Kenya

Abstract

The concept of microfinance is not new in Kenya, it has been around for some time, providing customers who were traditionally neglected by commercial banks a way to obtain financial services through cooperatives and development finance institutions. The Microfinance Act of 2006 operationalized the then microfinance institutions which were purely focusing on micro lending activities to apply for licenses from Central Bank of Kenya to allow them to take deposits from customers. Today these micro banking businesses that receive saving deposits are known as microfinance banks . According to Jensen (1986), the creation of a financial structure can influence the governance structure of a firm which, in turn, may influence the ability of a firm to make strategic choices. This study therefore sought to investigate the relationship between financial structure and financial performance of microfinance banks in Kenya. This study used a descriptive research design to describe the characteristics of the nine MFBs in Kenya as at 31 st December, 2014 and the study covered a five year period from 2010-2014. Secondary data was collected from the CBK, KNBS, and Association of Microfinance institutions of Kenya (AMFI) and the annual reports from the microfinance banks . Financial structure was measured as total debt to equity ratio whereas financial performance was measured using return on assets (ROA) which is net income divided by total Assets. In addition, six controlled variables were used; credit risk, liquidity risk, age of the microfinance banks , size of the MFBs and Gross Domestic Product (GDP). Data was then analyzed using a regression analysis model with the help of a statistical software, Statistical Package for Social Sciences (SPSS) version 21 and advanced Microsoft Excel 2010. Multiple regression analysis was used to determine the relationship between the variables under study. The data findings were presented using tables and graphs to show the relationships. The findings indicated that financial structure (total debt to equity ratio) positively affects the financial performance of the micro finance banks but the relationship was not significant. This study concludes by drawing some policy implications geared towards financial structure to enhance financial performance of the microfinance banks in Kenya. From the findings, the study recommends that strategies to ensure a financial structure that is suitable for achieving a good financial health and performance should be adopted by microfinance banks and the entire finance sector institutions as a whole. The study also recommends that the management of MFBs should pay special attention to Credit risk because the performance and success of micro banking business depends on accurate measurement and efficient management of this risk.