Effect of Financial Structure on Financial Performance of Deposit Taking Micro Finance Banks in Kenya

Abstract

Deposit Taking Microfinance Banks play a significant role in providing financial services to underserved segments of the population in Kenya. However, the financial performance of DTMFBs has been shown to be declining in recent years. The NPL (non-performing loan) ratio for DTMFBs increased from 9.8% in 2019 to 11.7% in 2020. The study sought to establish the effect of financing structure on financial performance of deposit taking microfinance banks in Kenya. Specifically, the study sought to determine the effect of short term debt on the financial performance of Deposit Taking Micro Finance Banks in Kenya; to assess the effect of long term debt on the financial performance of Deposit Taking Micro Finance Banks in Kenya; to evaluate the effect of retained earnings on the financial performance of Deposit Taking Micro Finance Banks in Kenya; and to evaluate the effect of share capital on financial performance of Deposit Taking Micro Finance Banks in Kenya. Signalling theory, dividend irrelevance theory, bird in hand theory, and pecking order theory will provide the theoretical foundation of the research. The correlational research design was adopted for the study. This research focused on the 14 DTMFBs. Data on financial structure and performance was gathered from secondary sources, with panel data covering the years 2017 through 2022. The data was analysed using statistical methods including multiple regression, correlation, and descriptive statistics using STATA (Version 16). The significance of the regression coefficients was examined using the t-statistic at the 5% level of significance. The analysis revealed that short term debt has a significant on financial performance of DTMFBs in Kenya (β =.0588, p=0.000<.05); long term debt has a positive but insignificant effect (β =.0184, p=0.191>.05) on financial performance; retained earnings have a positive significant effect on financial performance (β =.0662, p=0.000<.05) of the DTMFBs; share capital has a negative insignificant effect (β =-.0281, p=0.077>.05) on financial performance of the DTMFBs. The study suggests that DTMFBs in Kenya should carefully consider their short-term debt management strategies as an integral component of their financial operations.