EQUITY FINANCING AND FINANCIAL PERFORMANCE OF DEPOSIT-TAKING MICROFINANCE INSTITUTIONS IN KENYA
EQUITY FINANCING AND FINANCIAL PERFORMANCE OF DEPOSIT-TAKING MICROFINANCE INSTITUTIONS IN KENYA
Sharon Mukami Kamencu - Jomo Kenyatta University of Agriculture and Technology, Kenya
Dr. Kalundu Kimanzi - Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kenya
ABSTRACT
Deposit-taking microfinance institutions (DTMs) are an important segment of the financial system in that they mobilize deposits and provide credit and other financial services to low-income households, microenterprises and small and medium-sized enterprises that are often denied access to banking services. Equity financing is a key player in the improvement of their stability and capital adequacy. The objective of the study was to investigate whether the financial performance of DTMs in Kenya is significantly affected by equity financing. Agency theory and pecking order theory provided theoretical foundation for the study. All the fourteen licensed DTMs in Kenya were census and secondary panel data was collected from audited financial statements and yearly reports produced by the Central Bank of Kenya for the period 2016-2024. The empirical data was coded and analyzed with R-software. Financial performance was measured by return on assets (ROA) and equity financing was operationalized by the share capital to total assets ratio. Data analysis included descriptive statistics, correlation analysis, and panel regression model to explore the relationship between equity financing and financial performance of DTMs in Kenya. The study findings demonstrated that the effect of equity financing on financial performance of DTMs in Kenya was negative and statistically significant. The findings reveal that reliance on equity financing may have a negative impact on an institutions’ profitability. This highlights the need for an optimal mix of equity and other sources of financing. The results provide helpful knowledge to managers, investors and regulators in designing financial structure strategies to improve profitability while ensuring financial stability and profitability. The study recommends management to increase the efficiency of equity use through channelling funds to income generating investments with high returns.
