International Journal of Accounting and

Financial Management Research (IJAFMR)

ISSN(P): 2249-6882; ISSN(E): 2249-7994
Vol. 4, Issue 6, Dec 2014, 1-16
TJPRC Pvt. Ltd.

DETERMINANTS OF FINANCIAL PERFORMANCE OF MICROFINANCE

INSTITUTIONS IN KENYA: A CASE OF MICROFINANCE
INSTITUTIONS IN NAKURU TOWN
BIWOTT JAPHETH KIPKOECH1 & WILLY MUTURI2
1

Jomo Kenyatta University of Agriculture and Technology, Nakuru CBD Campus, Nakuru, Kenya
2

Jomo Kenyatta University of Agriculture and Technology, Nairobi, Kenya

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.

KEYWORDS: Financial Performance, Sustainability and Capital Adequacy

1. INTRODUCTION
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 (Robinson, 2003). An institution that provides the aforementioned financial intermediation services and is
regulated and governed by the key tenets proposed and endorsed by the Consultative Group to Assist the Poorest (CGAP)
and its 28 member donors is referred to as a microfinance institution (Adongo & Stork, 2005). While most literary works
interchangeably use the term microfinance and microcredit, these are actually two different terms with different
connotations. Microcredit is limited to small loans while microfinance to all financial intermediary services. Microcredit is
just but one of the many components of microfinance. The origins of the microfinance institutions and services can be
traced back to 1976 when Muhammad Yunus set up the Grameen Bank in Bangladesh (Hassan, 2002). This bank was
experimental in nature and its core purpose was to provide collateral free loans to poor rural households at full-cost interest
www.tjprc.org

editor@tjprc.org

Biwott Japheth Kipkoech & Willy Muturi

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.

2. STATEMENT OF THE PROBLEM

Most MFIs deal with a double bottom line. On the one hand they try to reach financial sustainability and on the
other hand they try to increase their socioeconomic impact (Simanowitz, 2003). Unfortunately, many MFI have not been
successful in achieving sustainability. Various reasons have been cited for this failure, although not conclusively.
Throughout the world, performance of microfinance institutions has been one of the issues that has recently captured the
attention of many researchers. The performance of microfinance institutions is a necessary condition for institutional
sustainability (Hollis & Sweetman, 1998). The microfinance paradigms focus on reduction of poverty through improving
access to finance and financial services. However, the positive impacts of microfinance institutions on the welfare of the
poor can only be sustained if the institutions can achieve a good financial performance. Several studies have also been
conducted, as well, to determine factors affecting the performance of MFIs using large and well developed MFIs in various

Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

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.

3. OBJECTIVES OF THE STUDY

The general objective of the study was to establish the factors influencing the performance of selected MFIs in
Kenya. The study was guided by the following specific objectives:

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.

www.tjprc.org

editor@tjprc.org

Biwott Japheth Kipkoech & Willy Muturi

4. 2 Capital Adequacy and Performance of Microfinance Institutions

Capital adequacy pertains to requirement for organizations conducting investment/financial business to have
sufficient funds and acts as measure of financial strength (Upchurch, 2005). According to (Upchurch, 2005) capital
adequacy has been cited as a crucial factor in sustainability of any organization and it is more so in the business of using
other peoples monies such as banking. Christen et al, (2005) notes that due to high volatility and scarce geographical
diversification of MFIs, the capital adequacy ratio should be high to ensure sustainability. The primary function of capital
to serve as a cushion on loaned funds to absorb losses that may occur. It also serves the function for the acquisition of
physical assets. The capital affords the engine and bumper that keeps the MFI going as well as taking up vicious shocks
and the more capital a bank has, the better it is able to sustain losses without running into insolvency.
4. 3 Number of Borrowers and Performance of Microfinance Institutions
Various studies have used the number of borrowers as a measure of performance of microfinance institutions
(Ganka, 2010; Mersland &Strom, 2009; Harmes et al, 2008). It is generally assumed that the larger the number of
borrowers the better the performance of microfinance institutions. According to Harmes et al, (2008), the larger number of
borrowers is found to be the biggest sustainability factor. On the contrary, Ganka (2010) in the study on Tanzanian
microfinance institutions reported negative and significant relationship between number of borrowers and financial
sustainability. The study concludes on the result that increased in number of borrower itself does not improve financial
sustainability of microfinance institutions. The reason could be increased inefficiency as a result of increased number of
borrowers. However, Hartarska (2005) reports that number of borrowers had no significant impact on financial
sustainability.
4. 4 Branch Network and Performance of Microfinance Institutions
According to Hubbard (2004), branch Network is the offices which belongs to an organization that are located in
different locations but are interlinked by use of technology. Large branch network ensures that clients can access the
branch network for savings deposits or loan repayment. According to (Hubbard 2004), branch banking leads to more
sustainable banking systems as it enables banks to diversify loans and deposits to a wider geographical location.
Institutions with large branch network are less likely to experience bank crisis in case of unpredictable event. Robinson
(2001) posits that successful MFIs organize their branches as profit centers and employ a method of transfer pricing that
ensures full-cost coverage throughout the branch network. Furthermore, the size and branch network of microfinance
institutions could also imply that large microfinance institutions and those with wide network coverage tend to have a large
capital and therefore can reach a relatively bigger number of clients. A study by Kyereboah-Coleman and Osei (2008) in
their study on outreach and profitability of microfinance institutions in Ghana found that the size and branch network of
MFIs had significant positive impact on the profitability of the MFI.
4. 5 Performance of Microfinance Institution
Performance measurement in organizations has been dominated by the use of traditional accounting measures as
the key financial performance measures. The use of financial metrics only is criticized to be past oriented as it uses the past
information which has low ability to determine about the future of the organization (Crabtree & DeBusk 2008). According
to Fisher (1995), financial performance measurement also lacks predictive ability to explain future performance as well as
providing little information of the causes and solution to problems facing organizations. As a result of limitations of
Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

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

www.tjprc.org

editor@tjprc.org

Biwott Japheth Kipkoech & Willy Muturi

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%.

6. RESULTS AND DISCUSSIONS

The researcher sought to find out the distribution of the respondents according to their gender, age bracket,
education level and working experience. The focus on experience was mainly on number of years worked in the current
microfinance institution. According to the findings, majority of employees are male (53%) while female were 47%.
The reason attributed to this may be due to the existing gender gap in employment in Kenya and the nature of the work in
the sector which require a lot of movement and outreach activities. The findings also indicate that a majority of employees
in the microfinance institutions of the age group 31-40 years (40%) while the least age group is above 50 years (4.4%).
This can be attributed to the high rate of unemployment in Kenya which has made the younger generation to seek
employment in the sector. The study further deduced that 60% of the respondents had a degree and above which was
attributed to the increased expansion of higher education opportunities in Kenya. The study further wanted to establish the
working experience of the respondents. This was important since previous studies indicated strong relationship between
work experience of employees and performance of microfinance institutions. Most of the respondents (40%) had between
1 3 years working experience in the institution. Cumulatively, more than 66% had less than 3 years of experience while
only 33.3% had more than 3 years working experience. This can be attributed to the fact that most private sector
institutions have employees on short-term contracts in an attempt to minimize human resource costs, maximize
productivity and to enhance employee performance which ultimately is geared towards enhanced performance of the
microfinance institution.
6. 1 Capital Structure and Performance of Microfinance Institution
The results of the analysis on factors associated with capital structure as it relates to performance of microfinance
institution are shown in Table 1. Majority of the respondents with a mean of 3.82 agreed when asked about whether
financing was mainly out long term debts. Further, with means of 4.07, 3.81 and 3.64 the respondents agreed when asked
Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

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

Mean Std. Dev.

45

3.82

0.964

Long term debts have positive effects on outreach

45
programs in your microfinance

4.07

0.837

Short term debts have positive effects on outreach

45
programs in your microfinance

3.33

1.102

There is difficulty in accessing long term debts in

your microfinance institution

45

3.81

0.953

The cost of risk of the debt financing is very high

thus affecting performance

45

3.64

1.061

Capital structure therefore has enhanced the

performance of the firm

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

www.tjprc.org

Min Max Mean Std. Dev.

Your microfinance has sufficient capital to cover

default in the loan portfolio

45 1

2.42

0.997

Capital adequacy base influence your lending

practices in your microfinance institutions

45 1

3.98

1.031

Capital adequacy affect client attitude and reduced

45 1
unfair market segmentation

3.14

1.127

Capital adequacy enables your MFI to apportion

funds for the realization of prudential regulations

45 1

4.23

0.854

Capital adequacy has enhanced our outreach to the

45 1
most optimal level

4.11

0.945

Capital adequacy therefore has enhanced

performance of our microfinance institution

3.99

0.988

45 1

editor@tjprc.org

Biwott Japheth Kipkoech & Willy Muturi

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

Branch network has influenced the performance

45
of your microfinance institution to a great extent

4.12

0.754

Increase in number of branches assisted in

increasing of the outreach as well as services
offered

45

3.85

0.991

Establishing branches closer to the rural areas to

45
serve the poor has enhanced service delivery.

3.79

1.043

Setting up branches closer to the people led to

increase in number of customers

45

4.22

0.747

Increase in branches has led to an increase in

number of active accounts

45

3.96

0.989

Branch network has therefore enhanced the

performance of the firm

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

Index Copernicus Value (ICV): 3.0

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

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

Min Max Mean Std. Dev.

45 1

4.32

0.713

There has been significant increase in the number

45 1
of active borrowers in your microfinance institution

3.72

1.102

The main source of financing is from interest on

active loan borrowers

45 1

3.27

1.232

Your MFI has worked hard to address the issue of

client trust thus reducing the transaction costs and
improve repayment rates.

45 1

3.43

1.121

Client trust has fostered collective action and

reduced free-riding, opportunistic behavior and
risks.

45 1

3.81

0.994

Your MFI has enhanced transparency and thus has

given voice to its clients which enhances client
45 1
loyalty and commitment

2.98

1.012

Number of borrowers has enhanced performance of

45 1
our microfinance institutions.

3.85

0.963

6.5 Performance of Microfinance Institution

The study sought to rate the level of influence of each independent variable on the performance of the MFIs.
The findings of the responses are presented in Table 5. From the findings, it was evident that the respondents ranked the
number of borrowers as the most important factor influencing the performance of MFIs (4.11). The findings are in
agreement with those of Nyamsogoro (2010), who found similar influence of number of borrowers on the performance of
MFIs.
Table 5: Performance of Microfinance Institution
n

Min Max Mean Std. Dev.

Capital structure has increased the

performance of your MFI

45 1

3.89

0.913

Capital adequacy has made our firm

invest more resources on our clients

45 1

3.92

0.996

Number of borrowers have increased

the performance of your MFI

45 1

4.11

0.872

Branch network has increased the

performance of your MFI

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
www.tjprc.org

editor@tjprc.org

10

Biwott Japheth Kipkoech & Willy Muturi

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.

Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

11

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

Y = 1.842 + 0.114X1 + 0.312X2+0.374X3 + 0.298X4

Where: Y = Performance of microfinance institutions,
X1 = Capital structure,
X2 = Capital adequacy,
X3= Number of borrowers,
X4 = Branch Network
The results also show the unique contribution to the explaining of the independent variable. The standardized
coefficients assess the contribution of each independent variable towards the prediction of the dependent variable, since
they have been converted in the same scale to show comparison. The result indicates that number of borrowers which has
the highest beta value of 0.432 has the greatest influence on performance of MFIs. The second most important variable was
capital adequacy with a beta value of 0.298. The third most important variable was branch network with a beta value of
0.146. The least important predictor of these four variables is capital structure with a beta value of 0.042. The t-test statistic
shows that all the beta coefficients are significant (since p<0.05).

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.

8. REFERENCES
1.

Adongo, J, & Stork, C. (2005). Factors Influencing the Financial Sustainability of Selected Microfinance
Institutions in Namibia. Windhoek, Namibia: The Namibian Economic Policy Research Unit, NEPRU.

2.

Brau, J. C. & Woller, G. M. (2004). Microfinance: A Comprehensive Review of the Existing Literature. Journal
of Entrepreneural Finance and Business Ventures, 9(1), 1-26.

3.

Bryman, A, & Bell, E. (2007). An Introduction to Social Research Methods for Business (2nd Ed.) Oxford: Oxford
University Press.

www.tjprc.org

editor@tjprc.org

12

Biwott Japheth Kipkoech & Willy Muturi

4.

CGAP. (2003). Microfinance consensus guidelines: Guiding principles on regulation and supervision of
microfinance, Washington, DC.

5.

Cooper, D, & Schindler, S. (2011). Business Research Methods, 11th Ed, New York: McGraw Hill.

6.

Conger, L. (2003). To Market, To Market. Enterprise Americas Magazine.

7.

Christen, R.P, Rhyne, E, Vogel, R, &McKean, C. (2005). Maximizing the Outreach of Microenterprise Finance:
An Analysis of Successful Microfinance Programs. 39(6), 131-140.

8.

Crabtree, & DeBusk. (2008). The Effect of Adopting the Balanced Scorecard on Shareholders Returns. Advances
in Accounting Incorporating Advances in International Accounting, 24, 8-15.

9.

Cull, R, Demirg-Kunt, A, &Morduch, J. (2009). Banks and Microbanks: Policy Research Working Paper 5078,
World Bank.

10. Cull, R, Demirguc-Kunt, A, &Morduch, J. (2007). Financial performance and outreach: A global analysis of
leading micro banks, The Economic Journal, 117, 107-133.
11. De Sousa-Shields, M, & Frankiewicz, C. (2004). Financing Microfinance Institutions: The Context for Transitions
to Private Capital. (Micro Report No. 32 - Accelerated Micro-enterprise Advancement Project -USAID).
12. Drake, D, & Rhyne, E. (2002). The commercialization of microfinance: Balancing business and development.
Bloomfield, CT: Kumarian Press.
13. Dunford, C. (2003). The Holy Grail of Microfinance: Helping the poor and sustainable: Microfinance evolution,
achievements and challenges, London: ITDG.
14. Farrington, T, & Abrams, J. (2002). The Evolving Capital Structure of Microfinance Institutions. MicroEnterprise Development Review, Washington D.C. (Inter-American Development Bank Working Paper).
15. Fehr, D, & Hishigsuren, G. (2004). Raising Capital For Microfinance: Sources of Funding andOpportunities For
Equity Financing. (Southern New Hampshire University, Working Paper No. 2004-01).
16. Fisher, J. (1995). Use of Nonfinancial Performance Measures in S M Young, Readings in Management
Accounting. Englewood Cliffs, NJ: Prentice Hall.
17. Ganka, D. (2010). Financial sustainability of rural microfinance institutions in Tanzania, PhD thesis, University of
Greenwich, Australia.
18. Gwasi, N, & Ngambi, M. T. (2014). Competition and performance of microfinance institutions in Cameroon,
International Journal of Research In Social Sciences, 3(8), 1-22.
19. Hassan, M. K. (2002). The Microfinance Revolution and the Grameen Bank Experience in Bangladesh. Retrieved
February 10, 2014, from Financial Markets, Institutions and Instruments: http://www.blackwellsynergy.com
20. Hartarska, V. (2005). Government and performance of microfinance institutions in Central and Eastern Europe,
World Development, 33, 1627- 1643.
21. Helms, B. (2006). Access for All: Building Inclusive Financial Systems. Washington, DC.

Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

13

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

22. Hermes, N, Lensink, R, & Meesters, A. (2011), Outreach and efficiency of microfinance institutions. World
Development, 39(6), 938948.
23. Hermes, N, Lensink, R, & Meesters, A. (2009). Financial Development and the Efficiency of Microfinance
Institutions. Centre for International Banking, Insurance and Finance, University of Groningen.
24. Hishigsurem, G. (2004). Evaluating mission drift in microfinance: Lessons for programs with social mission.
Evaluation Review, 31, 203-260.
25. Hollis, A, & Sweetman, A. (1998). Micro-credit: What can we learn from the past? World Development, 26,
1875-1891.
26. Hubbard, R. G. (2004). Money, the Financial System, and the Economy. Reading, MA: Addison-Wesley
Publishing Company.
27. Ittner, C, & Larcker, D. (1998). Innovation in performance measurement: trends and research implications.
Journal of Management Accounting Research, 6, 205-238.
28. Kathuri, N, & Pals, A. (1993). Introduction to Educational Research. Njoro, Kenya: Egerton University Press.
29. Kenya Open Data Survey. (2014). County Data Sheet : Nakuru. Retrieved January 21, 2014, from Kenya Open
Data Survey 2014: https://opendata.go.ke/facet/counties/Nakuru
30. Kereta, B. (2007). Outreach and financial performance analysis of Microfinance Institutions in Ethiopia, African
Economic Conference, Addis Ababa.
31. Kiiru, J. (2007). Microfinance, Entrepreneurship and Rural Development: Empirical Evidence from Makueni
District, Kenya. Retrieved from http://www.csae.ox.ac.uk/conferences/2007
32. Kipesha, E. F. (2013). Production and Intermediation Efficiency of Microfinance Institutions in Tanzania.
Research Journal of Finance and Accounting, 4(1), 149-159.
33. Kothari C. R. (2008). Quantitative Techniques (3rd Ed.). New Delhi: Vikas Publishing House PVT Ltd.
34. Kothari, R. (2006). Research Methodology: Methods and Techniques, New Delhi: New Age International
Publishers.
35. Kyereboah, A. (2007). The impact of capital structure on the performance of microfinance Institutors, Journal of
Risk Finance, 8, 56-71.
36. Ledgerwood, J. (2001). Microfinance Handbook: Sustainable Banking for the Poor. An Institutional and Financial
Perspective. Washington, DC: The World Bank.
37. Ledgerwood, J. (1999). Microfinance handbook: An institutional and financial

perspective, The World Bank

Publications, USA.
38. Matu, W. M. (2008). Sustainability and profitability of microfinance institutions. Unpublished MBA Research
Project, University of Nairobi.
39. Mersland, R, & Strom, R. (2009). Performance and governance in microfinance institutions, Journal of Banking

www.tjprc.org

editor@tjprc.org

14

Biwott Japheth Kipkoech & Willy Muturi

and Finance, 33, 662-669.

40. Mwenda, K, &Muuka, N. (2004). Towards best practices for finance institutions engagement in Africa rural areas:
selected cases and agenda for action, International Journal of Social Economics, 31, 143-148.
41. Mugenda, O, & Mugenda, A. (2003). Research Methods: Quantitative & Qualitative Approaches. Nairobi: Acts
Press.
42. Muriu, P. W. (2012). What Explains the low profitability of Microfinance Institutions in Africa? African Journal
of Social Sciences, 2(3), 85-115.
43. Mwangi, M. A. (2013). Effect of competition on the loan performance of deposit taking microfinance institutions
in Kenya: A case of Nairobi region. International Journal of Social Sciences and Entrepreneurship, Vol.1, Issue 2,
702-716.
44. Njagi, E. M. (2004). An investigation of factors affecting performance of microfinance institutions: A case study
of Central Division of Embu District, Unpublished MBA Thesis, Kenyatta University.
45. Nyamsogoro, G. (2010). Microfinance Institutions in Tanzania: A Review of Growth and Performance Trends.
The Accountant Journal, 26(3), 3-16.
46. Omino, G. (2005). Regulation and Supervision of Microfinance Institutions in Kenya. Nairobi.
47. Ondoro, C. O, & Omena, D. (2012). Effect of Microfinance Services on the Financial Empowerment of Youth in
Migori County, Kenya. Business and Management Review Vol. 2(3), ISSN: 2047 - 0398, 22-35.
48. Peter, C. (2007). The Success of microfinance: What really sustains this poverty relief effort, free market forum
discussion, School of Business, Nazarene University.
49. Robinson, M. (2003). The microfinance revolution: Sustainable finance for the poor, (1) Washington, D.C.: World
Bank.
50. Robinson, M. S, (2001). The Microfinance Revolution: Sustainable Finance for the Poor,(1), World Bank
Publication, Washington DC.
51. Rosenberg, R. (2009). Microfinance Institution Minimum Indicators that Donors and Investors Should Track.
Washington DC: The World Bank.
52. Rosenberg, R. (2002). Microcredit Interest Rates, Occasional Paper No. 1. Washington DC: CGAP.
53. Safakli, O. (2007). Measuring service quality of commercial banks towards SMEs in Northern Cyprus. J. Yasar
University 2(8), 827-839.
54. Schreiner, M. (2000). Ways Donors Can Help the Evolution of Sustainable Microfinance Organizations: Savings
and Development. Journal of International Development, 24(4), 423437.
55. Simeyo, O, Lumumba, M, Nyabwanga, R. N, Ojera, P, & Odondo, A. J. (2011). Effect of Provision of
Microfinance on performance of micro enterprises: A study of Youth micro-enterprises under Kenya Rural
Enterprise Program(K-REP), Kisii County. African Journal of Business Management, 5(20), 8290-8300.

Impact Factor (JCC): 4.4251

Index Copernicus Value (ICV): 3.0

15

Determinants of Financial Performance of Microfinance Institutions

in Kenya: A Case of Microfinance Institutions in Nakuru Town

56. Tuker, & Miles. (2004). Financial Performance of Microfinance Institutions, A Comparison of Performance of
Regional Commercial Banks by Geographic Regions. Journal of Microfinance, 6(1), 41-54.
57. Upchurch, A. (2005). Cost Accounting: Principles and Practice. Harlow: Financial Times/Prentice Hall.
58. Thapa, B, Chalmers, J, Taylor, W, &Conroy, J. (1992). Banking with the poor, report and recommendations
prepared by lending Asian banks and non-governmental organizations, Brisbane, Australia.
59. Wambugu, F, & Ngugi, J. (2012). Factors Influencing Sustainability Of Microfinance Institutions In Kenya: A
Case of Kenya Women Finance Trust, International Journal Of Innovative Research & Development, 1(11), 519537.
60. Woller, G, Dunford, C, & Warner, W, (2001). Where to Microfinance, International Journal of Economic
Development, 1(1), 29-64.
61. Zeller, M, & Meyer, R. (2002). Improving the performance of microfinance: Financial sustainability, outreach and
impact, in: Zeller, M. & Meyer, R. L.: The triangle of microfinance. Baltimore: The Johns Hopkins University
Press.

www.tjprc.org

editor@tjprc.org