CAPITAL STRUCTURE AND FINANCIAL PERFORMANCE OF MICROFINANCIAL INSTITUTIONS IN NAIROBI CITY COUNTY KENYA
Rovinson Okinyi Odero - Masters Student, Kenyatta University, Kenya
Dr. Vincent Shiundu Mutswenje - Department of Accounting and Finance, Kenyatta University, Kenya
ABSTRACT
This research was intended to appraise ramification of the capital system on commercial return of micro-financial institutions in Kenya's Nairobi City County. The research was seeking to resolve the following problem. What are the capital structure features used by the MFI? Is there a connection between the composition of capital and the viability of firms? If the business size has an impact on earnings before tax? The study was motivated by the following capital structure theories, which are the theory of Modigliani and Miller, standard theory, the theory of net income method and the theory of net operating income approach. To define the independent variable, the researcher used a descriptive analysis design. To explicate sequel of predictor variables on the responding variables, explanatory research may also be used. The target demographic of the research is to be all 14 successful microfinance companies as recognized by the Kenya Microfinance Act as of 2020. The research therefore represents a census survey with a period of 5 years (from 2014-2018). The study's research model consisted of the independent variable debt ratio, the equity ratio and the size of the company as a moderating variable, determined by the company's gross asset value, and the following ratios as dependent variables: return on equity. To analyze the results, Stata will be used. There will be descriptive and inferential statistics execution. The gradation of correlation allying to covariate parameter and responding parameter used in the sample will be defined by regression analysis. A certain diagnostic result can be calculated before the study is completed. Out-turn in the form of tables and graphs will then be displayed. The inferential statistics revealed that equity financing has statistical negligible sway on the financial return of MFIs (p=0.155>0.05). Debt financing was found to have a statistically significant influence on financial performance of MFIs (p=0.024<0.05), the findings further showed that firm size averaged at -0.0132. The findings show however, firm size was not a significant moderator (p=0.581>0.05) in this study. The study suggested that with the establishment of negative correlation between debt financing and the financial performance, in pursuit of higher profit and better performance the firm management can utilize debt financing by taking the advantage of tax shield benefit, another study was suggested to be done using the same variables but now using the Return on Asset as the contingent on parameter. The study suggested the occurrence of indistinguishable evaluation in supplemental financial sphere such as Saccos and Insurance companies’ further study with involvement of other capital structure rations was also suggested.