Determinants of Growth of Mutual Fund Institutions in Nairobi Securities Exchange in Kenya

Abstract

Kenya’s recent external borrowing is an indictment on the country’s financial sector. The borrowing shows that the financial market was not able to avail the needed funds locally. This study aims to improve local mobilization of funds so as to meet local financial needs. Mutual fund institutions was identified as a key institution in funds mobilization. The purpose of this study was to investigate the drivers of growth of mutual fund institutions in Kenya. The study was guided by five specific objectives namely: investors’ perception, financial market liquidity, portfolio diversification, regulatory framework and financial innovation. These variables were expected to positively impact on the growth of Mutual fund institutions. The study variables were underpinned by four theories namely: the theory of modern portfolio, agency theory, liquidity theory and financial innovation theory. The study targeted 61 funds/ units operating under 18 listed fund institution in 2018. The study adopted cross-sectional survey design for obtaining data. The design was preferred due to its ability to combine quantitative and qualitative methods. Both secondary data and primary data were collected during the study. The typed questionnaires were used as the data collection instrument for primary data while financial statements provided the secondary data. Stratified random sampling was used to ensure that each fund type was proportionately represented in the study. Data collected was subjected Cronbach's alpha coefficient test for reliability while validity was tested through pilot study for content and factor analysis for construct validity. The researcher tested for Linearity, normality and homoscedasticity to ensure that none of these affects the outcome. Data analysis and interpretation was based on descriptive statistics and measures of dispersion as well as inferential statistics; bivariate and multivariate regression analysis, Pearson correlation, factor analysis and analysis of variance were employed. Multi-linear regression model was used in explaining the influence of identified drivers (investors’ perception, financial market liquidity, portfolio diversification, regulatory framework and financial innovation) and growth of mutual fund institutions in Kenya. The study results indicated that financial market liquidity, and regulatory framework all had statistically significant influence on growth of mutual funds linked with assets under management while investors’ perception and portfolio diversification had a fifty –fifty influence on growth of mutual funds institutions linked with asset under management. Investors’ perception and financial market liquidity had statistically significant influence on growth of mutual fund institutions linked with return on investment, portfolio diversification and regulatory framework had mixed results while financial innovation had no significant influence on growth of mutual fund institutions linked with return on investments. Financial innovation did not have a statistical influence on growth of mutual funds linked with assets under management. The overall findings are that all identified independent variables except Financial Market Liquidity had statistically significant influence on growth of mutual fund institutions. The study benefited all financial market players by identifying the variables that should be enhanced for the growth of mutual fund institutions. Researcher can also identified other areas of study with regard to growth of mutual fund institutions. Contrary to the widely held view that financial market liquidity enhances growth of financial institutions, this study found that financial market liquidity does not significantly influence growth of mutual fund institutions. The study brought in the construct of market resilience which was an extension of the generally used resilience. It included market immediacy, market depth and market resilience.