Determinants of Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Abstract

Financial performance of an institution determines its outreach and depth in service provision. The purpose of this thesis was to study the determinants of financial performance of Deposit Taking Microfinance Institutions (DTMIs) in Nairobi City County, Kenya. The specific objectives of the study were; to assess the effect of Financial Leverage, Non-performing Loans, Capital Structure, and Market Structure on financial performance of DTMIs in Nairobi City County in Kenya. A mixed research design was used employing explanatory, descriptive and longitudinal designs. The target population of the study were all the thirteen DTMIs in the Nairobi City County, but a purposive sample of nine was used; that is, those that were registered and in operation by 2012. This is because, these are the DTMIs that have been captured in the bank supervision annual reports by CBK including the most current (dated 31st December 2014). These reports were major sources of secondary data for the study. By use of data collection schedules, secondary data was extracted from the published CBK banks supervision annual reports for years 2013 and 2014. For the purposes of primary data collection, proportionate random samples were selected from each of the sampled DTMIs using simple random sampling method. The sampling targeted portfolio managers and credit officers in all the nine DTMIs. The selected officers then complete questionnaires designed to collect the desired qualitative as well as quantitative data. The questionnaires were administered using the drop-and-pick method. The collected data was presented using contingency and frequency tables, graphs, charts and plots. The study partly used qualitative data (Likert scale data). To analyze these data, descriptive statistics such as the mean for central tendency and standard deviations for variability was computed. Other statistical procedures included the Pearson's coefficient of correlation, t-test, Analysis of Variance (ANOVA) and regression procedures. To assess normality of the data for modeling and parametric inference, Q-Q plots were constructed and coefficients of skewness and kurtosis determined. Durbin-Watson test was used to test for autocorrelation and correlation matrices were also used to check for relationships and collinearity/multicollinearity. Multiple linear regression analysis was performed on the data for each year, and for both years combined. This yielded to three multiple linear regression models which were very useful for comparison and confirmation of the relationships. Adjusted coefficients of determination, Fisher’s tests and the t-tests were used to assess the goodness of fit of the developed models. All data modeling and hypotheses tests was performed at five per cent significance level and the analysis software that was used were Statistical Package for Social Sciences (SPSS), R-Statistical software and Ms Excel. The results indicated that there was a positive relationship between financial performance and financial leverage, non-performing loans, capital structure and market structure. The study concluded that all the variables under study are statistically significant in explaining the financial performance of DTMIs in the Nairobi City County in Kenya. The study recommends that the DTMIs should; avoid overreliance on debt financing, have a thorough loan documentation system to avoid accumulation of non-performing loans, maintain an optimal capital structure, increase product awareness in the market and rely more on research and development in pricing of their services.