Firm Characteristics and Financing of Mfis in Kenya

Abstract

This paper investigates whether firm characteristics have an influence on financing of MFIs in Kenya using a sample of 12 Microfinance firms. Primary and secondary data were collected and subjected to multiple regression and correlation analysis in order to achieve the study objectives. Firm characteristics, which are the independent variables, were measured by size, profitability, and risk, while financing of MFIs, which is the dependent variable, was measured by the Debt-Equity ratio and by the ratio of capital to total assets. Results of this study suggest that, a strong negative association between return on equity and total assets has an equally strong negative effect/influence on the debt equity ratio. This implies that, the two variables have a strong negative effect on the financing of MFIs. Overall, the implications of the findings of this study support both the trade-off theory and the pecking order theory of capital structure. Since this study focused on only one segment of the small and medium enterprise sector, there is need to carry out further research on all segments of the small and medium enterprises sector, first independently and then on the entire sector. Findings of such a study will be extensive enough to provide a good platform for formulating financing policy guidelines for the entire sector, especially after carrying out comparative analysis on the independent segment results. The study recommends that, finance managers of MFIs need to embrace innovation as a way of increasing the efficiency of the assets. Increased efficiency of assets is critical to maximizing the profitability of the firms, which consequently reduces the negative impact arising from the cost of debt (financing costs). Additionally, finance managers are advised to adopt a residual dividend policy while at the same time, emphasizing on cost-effectiveness.