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Effect of Capital Structure on Financial Sustainability of Deposit-Taking Microfinance Institutions in Kenya

Author

Listed:
  • Wambua Mary Mwongeli

    (Department of Finance Machakos University, Machakos, Kenya)

  • Jared Ariemba

    (Department of Business and Entrepreneurship South Eastern Kenya University, Kitui, Kenya)

Abstract

The purpose of this research was to empirically investigate the effect of capital structure on financial sustainability of deposit-taking micro finance institutions (DTMs) in Kenya. The specific objectives were to determine the impact of debt on the financial sustainability of DTMs in Kenya, to assess the influence of retained earnings on the financial sustainability of DTMs in Kenya, to examine the effect of ordinary share capital on the financial sustainability of MFIs in Kenya, and to investigate the impact of preferred share capital on the financial sustainability of DTMs in Kenya. The target population of the study was all the 13 DTMs in Kenya registered with the Central Bank of Kenya. Secondary data was collected on all the DTMs financial data from the Central Bank of Kenya reports. Data was analyzed using multiple regression model using SPSS and R as the data analysis tool. Based on the findings 76.9% of the DTMs did not earn enough revenue to cover the actual financing direct costs, which include the total operating costs, loan loss provisions and the financing costs but excluding the cost of capital. The analysis of variance (ANOVA) table indicated that the predictor variables influenced the predictor variable significantly at 5% significance level. Among the four variables; debt and retained earnings were statistically significant variable at 5% significance level with 1.265 and 1.630 coefficient respectfully. Whereby the financial sustainability change by 1.265 and 1.630 for every unit change of debt or retained earnings respectfully. Therefore, for the deposit-taking microfinance institutions to remain afloat in the lending business, they should utilize any borrowing opportunity, plough back profits to the business, and low proportion of preferred share capital. Deposit-taking microfinance institutions should avoid usage ordinary share capital as it negatively affected financial sustainability.

Suggested Citation

  • Wambua Mary Mwongeli & Jared Ariemba, 2018. "Effect of Capital Structure on Financial Sustainability of Deposit-Taking Microfinance Institutions in Kenya," Business, Management and Economics Research, Academic Research Publishing Group, vol. 4(1), pages 1-10, 01-2018.
    • Handle: RePEc:arp:bmerar:2018:p:1-10
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    References listed on IDEAS

    as
    1. Myers, Stewart C, 1984. " The Capital Structure Puzzle," Journal of Finance, American Finance Association, vol. 39(3), pages 575-592, July.
    2. Ayi Gavriel Ayayi & Maty Sene, 2010. "What drives microfinance institution's financial sustainability," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(1), pages 303-324, September.
    3. Saumitra Bhaduri, 2002. "Determinants of capital structure choice: a study of the Indian corporate sector," Applied Financial Economics, Taylor & Francis Journals, vol. 12(9), pages 655-665.
    4. Shakil Quayes, 2012. "Depth of outreach and financial sustainability of microfinance institutions," Applied Economics, Taylor & Francis Journals, vol. 44(26), pages 3421-3433, September.
    5. Myers, Stewart C., 1984. "Capital structure puzzle," Working papers 1548-84., Massachusetts Institute of Technology (MIT), Sloan School of Management.
    6. Heinkel, Robert & Zechner, Josef, 1990. "The Role of Debt and Perferred Stock as a Solution to Adverse Investment Incentives," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 25(01), pages 1-24, March.
    7. Stewart C. Myers, 1984. "Capital Structure Puzzle," NBER Working Papers 1393, National Bureau of Economic Research, Inc.
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