Jomo Kenyatta University of Agriculture and Technology, Nakuru CBD Campus, Nakuru, Kenya
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ABSTRACT
Microfinance basically relates to all financial intermediation services such as savings, credit, funds transfers,
insurance, pension and remittances among others by financial institution in both rural and urban areas to low income
earners. As the MFIs continue to blossom around the world spreading the concept of microfinance in all the continents,
researchers are interested to study whether microfinance institutions can be sustainable over time through their
performance. The purpose of this study therefore was to establish some of the factors that influence the performance of
microfinance. It was hypothesized that capital structure, capital adequacy, number of borrowers and branch network
influence performance of MFIs in Kenya. The study sought to establish the relationship between these factors and
performance of microfinance institutions. Financial performance was mainly focused on return on assets. The study was
conducted using both quantitative and qualitative approaches using descriptive research design. Data was collected using
questionnaires targeting managers and finance-related employees. The study sampled 52 respondents from selected
microfinance institutions in Nakuru Town. The study used descriptive statistics specifically employing measures of central
tendency and dispersion to analyze data and the results will be presented in tables. Further, the study employed regression
analysis to infer their relationships. It was found that number of borrowers, capital adequacy and branch network had the
greatest influence on the performance of microfinance institution. The multiple regression analysis indicated the variables
explained 63.7% of the independent variable which indicate that they significantly explain the variation in the dependent
variable.
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payable on regular installments. The bank organized the borrowers in peer based groups to minimize the risk of defaulting
as a result peer of pressure. This signified the birth of microfinance institutions and services. Microfinance services must
be complemented with basic business management skills to ensure that the recipients of such services make effective use
of the same (Ondoro & Omena, 2012). The aim of micro-financing is to not just to address capital based needs but also
general business management and risk management related aspects of businesses. Therefore, literature has established that
microfinance has been instrumental in alleviating poverty all over the world. Microfinance increases the incoming earning
capacity of the low income households; especially those that own micro-enterprises. Microfinance helps such households
increase their income earnings in addition to helping them increase and diversify their asset portfolio.
Microfinance institutions are in operation in East Africa under different models. In this region provision of
microfinance services is a function of credit and Savings and Credit Cooperative Organizations (SACCOs). The SACCOs
are formed with respect to a particular economic activity (Kiiru, 2007). Access to microfinance loans and other services is
limited in Kenya and other East African nations due to lack collateral and the high interest rates (Simeyo et al, 2011).
In addition, most of the individuals who qualify for loan facilities from microfinance institutions spend most of their
earnings repaying the loan while leaving very little for savings and reinvestment into their enterprises. As such very few
micro-enterprises rarely transition to become small and medium enterprises (SMEs). In the past years there have been few
studies focusing on the performance of microfinance institutions and other factors that can influence it. As the MFIs
continue to blossom around the world spreading the concept of microfinance in all the continents, researchers are interested
to study whether MFIs can be sustainable over time. Some of those institutions have assumed the status of non-profit
organizations, concentrating their efforts mostly on the social part of the lending process. These institutions often base their
survival on grants, subsidies or aid from those organizations or individuals willing to support them. Literature on
performance indicate that a number of factors influence the long term financial self-sufficiency of MFIs. The capital
structure is found to be an important determinant of the institution success, together with the positive influence of the
collection of deposits from clients. Moreover macroeconomic variables such as inflation and lending rate are also found to
have an effect on the MFI self-sufficiency. Other factors affecting MFI performance are a low portfolio at risk, a low
percentage of non-earning liquid assets and the yield on gross portfolio suggesting that high interest rates on loans
contribute to the institution performance. Other factors cited in literature include number of borrowers, debt equity ratio,
and portfolio at risk among others. It is therefore imperative that a study on the determinants of financial performance of
MFIs in Kenya be undertaken if the growth vision of the country is to be achieved.
countries. The level of significant of these factors in affecting the performance of MFIs, however, varies with studies.
Some of the factors are found to be significant in one economy or applicable to a set of MFIs, some are not significant.
Moreover, studies done in Kenya have not exhaustively focused on all the factors influencing performance of MFIs.
Accordingly, the main objective of this study will be to investigate factors that influence the performance of microfinance
institutions in Kenya. Four factors identified through a scan of relevant literature (Capital structure, Capital Adequacy,
Number of Clients Served, Branch network) are hypothesized to influence MFI performance in Kenya.
To establish the influence of capital structure on performance of selected microfinance institutions in Kenya
To examine the influence of capital adequacy on performance of selected microfinance institutions in Kenya
To assess the influence of number of borrowers on performance of selected microfinance institutions in Kenya
To analyze the influence of branch network on performance of selected microfinance institutions in Kenya
4. LITERATURE REVIEW
Several studies have been conducted to determine factors affecting the performance of microfinance institutions
using large and well developed MFIs in various countries. According to Cull et al, (2007), some of the determinants are
found to be significant in one economy or applicable to a set of MFIs, some are not significant. For the purpose of this
study we review empirical literature based on the influence of capital structure, capital adequacy, number of borrowers and
branch network.
4.1 Capital Structure and Performance of Microfinance Institutions
The combination of various sources of capital could affect profitability and, therefore, sustainability of
microfinance institutions. According to Woller & Schreiner (2002) the various sources includes loans, savings, deposits
and shares. Several studies have been conducted to explain whether the capital structure determines the performance of
microfinance institutions. For instance, Kyereboah (2007) found that highly leveraged microfinance institutions have
higher ability to deal with moral hazards and adverse selection than their counterparts with lower leverage ratios.
Moreover, Ganka (2010) states that although how the capital has been structured affects the performance of microfinance
institutions, having different sources of capital do not improve financial sustainability. The study also identified that equity
is a relatively cheaper source of financing and, therefore improves performance of microfinance institutions. Robinson
(2001) asserts that a large number of clients depend on microfinance commercial sources of funds, which in turn depends
on performance of microfinance institutions. This suggests that microfinance institutions with higher capital are expected
to have more clients than those with less capital. Apart from the volume of capital, the combination of various components
of the capital could also affect profitability and therefore the performance of microfinance institutions. Similarly,
Wambugu and Ngugi (2012) in their study on factors influencing financial sustainability of MFIs in Kenya found a
positive correlation between capital structure and financial sustainability of MFIs. With these findings in mind, the current
study seeks to establish the between capital structure and performance of microfinance institutions in Kenya.
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financial measures and increased competitive pressure, most of the managers of organizations changed their focus on
measuring performance by including nonfinancial measures in their performance measurement systems (Ittner & Larcker,
1998). Performance measurement in MFIs has recently undergone some significant changes from both internal and
external point of views. The external factors such as, changes in the business environment, changes in technology,
involvement of commercial banks in MFIs and increased competition resulted into a shift in MFIs performance
measurement trend with most of stakeholder requiring not only improvement in financial performance measures but also a
balance between financial and non financial measures (Hermes et al, 2011). According to Zeller & Meyer, (2002),
performance of MFIs can be viewed as a triangle comprising outreach to the poor, poverty impact and financial
sustainability. Rosenberg (2002) on the other hand, shows that MFIs performance measurements involve four core areas,
outreach to poor, repayment rates, sustainability and efficiency. Empirical evidences on performance of microfinance
institutions have reported different results, most of them indicating variation of performance across types of MFIs.
The study by Tucker and Miles (2004) used financial metrics to compare performance of microfinance institutions with
commercial banks operating in four regions Africa, Asia, Eastern Europe and Latin America. The findings of the study
show that, MFIs that were OSS had higher performance in terms of return on asset (ROA) and return on Equity (ROE).
All these studies used financial metrics in the measurement of performance of microfinance institutions. Accounting
profitability can thus be used as a high standard measure of financial sustainability (Cull et al, 2007). The present study
intends to employ the accounting profitability approach since the income expenditure framework can be expanded in the
MFI sector.
5. RESEARCH METHODOLOGY
Although there are numerous research designs, the study employed a descriptive research design. Descriptive
research design was appropriate as it enabled the researcher to generalize the findings to a large population. The focus of
this study was to establish the determinants of financial performance of MFIs in Kenya. The study utilized quantitative
approaches in the collection of data. According to Kothari (2009), the approach enables data to be systematically collected
and analyzed in order to provide a descriptive account of the variables under study. The study focused on managers and
finance related employees of all the MFIs in Nakuru Town. The financial management process of the MFIs involves a
cross section of individuals and most importantly the departmental heads of the MFI since they play a major role in the
decision making and ultimately the performance of the MFI. For the purpose of the study, the population comprised all the
18 managers and 5 finance-related employees thereby making the population of the study to be 108 employees of MFIs in
Nakuru Town.
From the target population of 108 employees, a sample of 52 employees which is a true representative of the
population was selected randomly among 18 MFIs in Nakuru Town. The size was selected based on the time, budget
allocation, population distribution among other factors. The researcher therefore used purposive sampling techniques in
selecting the respondents. Purposive sampling is where the researcher consciously decides who to include in the sample.
Data was collected primarily using questionnaires since they are the best tool for a researcher who wishes to acquire the
original data for describing a population. The researcher attempted to personally administer the questionnaires to ensure
correct information is received from the respondents. To ensure validity, the researcher used accurate measuring
instruments, standardize data collection procedures by guiding the respondents appropriately and carried out piloting to
determine usefulness of instruments, clarity in terminology, focus of questions, relevance and applicability, time required
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and methods for analysis. Reliability was determined through the Cronbach alpha coefficient analysis. From the analysis,
since all the alpha values were greater than 0.70, the data collection toll was deemed to be reliable. For the purpose of
analyzing the relationships of each of the independent variable on the dependent variable, the study used regression
analysis to test the hypothesis of the study. The study hypothesized the following relationship:
Y = B 0 + B 1X 1 + B 2X 2+ B 3X 3 + B 4X 4
Where: Y = Performance of microfinance institutions,
X1 = Capital structure,
X2 = Capital adequacy,
X3= Number of borrowers,
X4 = Branch Network,
B0, B1, B2 B3, and B4 = Beta Coefficients
Out of 52 questionnaires that were issued to the sampled respondents, 48 of them were filled and returned. Of the
returned questionnaires, 3 were incorrectly filled and thus were not used in the final analysis. Therefore, 45 were correctly
filled and hence were used for analysis representing a response rate of 86.5%.
whether long term debts had positive effects on outreach programs, whether there was difficulty in accessing long term
debts and whether the cost of risk of the debt financing was high thus affecting the performance of the microfinance
institution.
Table 1: Capital Structure and Performance of Microfinance Institution
n
Financing in your microfinance is mainly out of
long term debts
Min Max
45
3.82
0.964
4.07
0.837
3.33
1.102
45
3.81
0.953
45
3.64
1.061
45
3.91
0.984
The respondents further were unsure with a mean 3.33 when asked whether short term debts had positive effects
on the performance of the institution. This could be attributed to the sensitive nature of the information on short term
financing which most institution would be unwilling to release bearing in mind the level of competition in the industry.
The respondents however were in agreement with a mean of 3.91 that the capital structure enhances the performance of the
microfinance institution.
6. 2 Capital Adequacy and Performance of Microfinance Institution
The findings in this section are in line with the second study objective. Table 2 shows the findings related to
capital adequacy and performance of microfinance institutions in Nakuru Town. The respondents, on average, agreed that
capital adequacy influences the lending practices of the microfinance institution (3.98), capital adequacy has enabled the
microfinance institution to apportion funds for realization of prudential regulations (4.23) and that employers keen interest
in their welfare increases their output (3.95), a good working environment enhances their individual and organizational
performance (4.13) and that capital adequacy has enhance outreach to the optimal level (4.11).
Table 2: Capital Adequacy and Performance of Microfinance Institution
n
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45 1
2.42
0.997
45 1
3.98
1.031
3.14
1.127
45 1
4.23
0.854
4.11
0.945
3.99
0.988
45 1
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The respondents were unsure whether capital adequacy affected client attitude and reduced market segmentation
(3.14). The respondents however disagreed that the microfinance institutions have sufficient capital to cover default loan
portfolio (2.42). The respondents were however in agreement that capital adequacy enhances the performance of
microfinance institution (3.99). The researcher therefore deduced that that capital adequacy plays a key role in enhancing
the performance of microfinance institution since the institution would then have resources to apportion for prudential
regulations, outreach programs, network expansion and diversification and it also stabilizes the effects of loan default
portfolio. Microfinance institutions have therefore to work towards ensuring stability and sustainability of the capital
adequacy systems so as to ensure continued positive performance of microfinance institutions.
6.3 Branch Network and Performance of Microfinance Institution
In this section the researcher presents various aspects on branch network as it relates to performance of
microfinance institution. The findings are based on a 5-point Likert scale and are depicted in Table 3.
Table 3: Branch Network and Performance of Microfinance Institution
n
Branch diversification has influenced the
performance of your microfinance institution
Min Max
Mean
Std. Dev.
45
3.97
0.977
4.12
0.754
45
3.85
0.991
3.79
1.043
45
4.22
0.747
45
3.96
0.989
45
3.88
0.984
Regarding branch network, most of the respondents were in agreement with a number of issues. Notably, branch
diversification had influenced the performance of the microfinance institution (3.97), branch network had influenced the
performance of the microfinance institution to a great extent (4.12), and that the increase in number of branches assisted in
increasing of the outreach as well as services offered (3.85). Further, the respondents were in agreement that establishing
branches closer to the rural areas to serve the poor had enhanced service delivery (3.79), setting up branches closer to the
people led to increase in number of customers (4.22) and that the increase in branches had led to an increase in number of
active accounts (3.96). The respondents therefore were in agreement that branch network had enhanced the performance of
the microfinance institution (3.88). The study concluded that branch network which is key to outreach and outreach
program influences the performance of microfinance institution.
6. 4 Number of Borrowers and Performance of Microfinance Institution
The findings in this section are in line with the last study objective. Table 4 shows the findings related to number
of borrowers and performance of microfinance institutions in Nakuru Town. From the findings, it was evident that the
number of active borrowers affects the performance of the MFI (4.32), there has been significant increase in the number of
active borrowers in the MFIs (3.72) and that client trust had fostered collective action and reduced free-riding,
Impact Factor (JCC): 4.4251
opportunistic behavior and risks (3.81). The respondents were however unsure if the main source of financing was from
interest on active loan borrowers (3.27), whether the MFIs had worked hard to address the issue of client trust thus
reducing the transaction costs and improving repayment rates (3.43) and whether the MFIs had enhanced transparency and
thus given voice to its clients which enhanced client loyalty and commitment (2.98). The respondents however agreed that
the number of borrowers had enhanced performance of MFIs (3.85). The study therefore deduced that the number of
borrowers significantly influences performance of MFIs.
Table 4: Number of Borrowers and Performance of Microfinance Institution
n
The number of active borrowers affects the
performance of your MFI
45 1
4.32
0.713
3.72
1.102
45 1
3.27
1.232
45 1
3.43
1.121
45 1
3.81
0.994
2.98
1.012
3.85
0.963
45 1
3.89
0.913
45 1
3.92
0.996
45 1
4.11
0.872
45 1
3.76
1.142
Furthermore, the findings indicate that capital structure (3.89), capital adequacy and branch network equally play
a significant role in the performance of MFIs. The findings are in tandem with those of Wambugu and Ngugi (2012) who
found similar trends in their studies of factors influencing performance of Kenya Women Finance Trust. The study sought
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to establish the trend of Return on Asset (ROA) which is a ratio of average net income and average total assets in the last 3
years. From the study findings, majority (67%) indicated an increase in return on assets, 73% indicated that there has been
an increase in average total assets while 62.5% of the respondents indicated that there has been an increase in loan
portfolio. Generally, there was an increase in mean return on assets across MFIs in Nakuru Town.
6.6 Regression Model Summary
The study carried out a regression analysis on the influence of the independent variables namely capital structure,
capital adequacy, number of borrowers and branch network on the dependent variable. The model summary is depicted in
Table 5.
Table 5: Regression Model Summary
Model
R Squared
0.7984
0.6374
Adjusted R
Squared
0.6298
Std Error of
the Estimate
0.1247
The R2, the coefficient of determination shows variability in dependent variable explained by the variability in
independent variables. This value tells us how performance of MFIs in Nakuru Town can be explained by capital structure,
capital adequacy, number of borrowers and branch network. The R2 value of 0.6374 implies that 63.7% of the variations in
the performance of MFIs are explained by the variations in independent variables. This therefore means that other factors
not studied in this research contribute 37.3% of the performance of microfinance institutions in Kenya.
6. 7 Multiple Regression Analysis
The researcher further conducted a multiple regression analysis and the findings of the multiple regression
analysis are depicted in Table 6.
Table 6: Multiple Regression Analysis
Model
1
Constant
Capital Structure
Capital Adequacy
Number of borrowers
Branch Network
Unstandardized
Coefficients
B
SE
1.842
1.311
0.114
0.064
0.312
0.148
0.374
0.157
0.298
0.144
Standardized
Coefficients
B
0.084
0.298
0.432
0.146
t
1.773
1.432
3.220
3.541
2.732
p
0.271
0.05
0.01
0.01
0.04
From the multiple regression model, holding capital structure, capital adequacy, number of borrowers and branch
network constant, performance of MFIs would increase by 1.842. It was established that a unit increase in capital structure
would cause an increase in performance of MFIs by a factor of 0.114, a unit increase in capital adequacy would cause an
increase in performance of MFIs by a factor of 0.312, a unit increase number of borrowers would cause an increase in
performance of MFIs by a factor of 0.374, and a unit increase in branch network would cause an increase in performance
of MFIs by a factor of 0.298. This shows that there is a positive relationship between performance of MFIs and the
independent variables in the study.
The un-standardized beta coefficients in Table 6 were then used to obtain the overall relationship of the
independent variables and dependent variable.
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7. CONCLUSIONS
Based on the findings of the study, the researcher has drawn several conclusions. Firstly, it is concluded that
though capital structure is not a key component in enhancing performance of microfinance institutions, MFIs must strive to
enhance and stabilize their capital structures in order to enhance their performance. Secondly, it is concluded that although
there is evidence of attempts to stabilize and enhance capital adequacy, MFIs still face shortages in acquiring sufficient
capital. Moreover, it is inferred that capital adequacy would positively influence performance of microfinance institutions
and as such it is paramount that these MFIs continuously source for capital if their performance is to be sustained. Thirdly,
it is concluded that branch network plays a key role in ensuring outreach which is a key function of microfinance
institutions. Further, branch network enhances the number of account holders which is key in ensuring capital adequacy.
The study established a very strong positive relationship between branch network and performance of microfinance
institutions. Lastly, it is concluded that in order to enhance performance of MFIs, the institutions must work towards
increasing and sustaining higher number of borrowers since one of the major sources of financing in MFIs is interest on
loans. Furthermore, active borrowers would enhance net income and also maintain account balances that would go towards
enhancing capital sufficiency. The study established a very strong positive relationship between branch network and
performance of microfinance institutions.
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