Effect of capital structure on financial sustainability of deposit-taking microfinance institutions in 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 version 21 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 0.569 and 0.738 coefficient respectfully, whereby the financial sustainability change by 0.569 and 0.738 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.