Capital Structure and Financial Performance of Micro-Finance Institutions in Mombasa County, Kenya

Abstract

Microfinance institutions play a key role in serving financially excluded demographics where commercial banking may be scarce or entirely nonexistent. However, outreach to the economically disadvantaged in remote geographic regions remains hindered by considerations of financial feasibility. The financial performance of microfinance institutions has been on the decline in the recent past. Most businesses fail resulting from poor financing decisions. To date, the mechanisms behind the positive relationship between capital structure and business performance have received great attention from various scholars. However, empirical studies examining the effect of capital structure on firm performance have yielded mixed conclusions. The purpose this quantitative correlational study was to examine the effect of capital structure on financial performance of microfinance institutions in Mombasa County, Kenya. Specifically, the study sought to examine the effect of short-term debt capital structure, long-term debt capital structure, short-term equity capital structure and long-term equity capital structure on performance of microfinance institutions in Mombasa County, Kenya. The theoretical framework is anchored on the capital irrelevance theory, pecking order theory, and the trade-off theory. The study employed the correlational, cross-sectional survey research design to test non-causal relationships among study variables. The target population consisted of 56 branch managers and 56 operations managers of the 56 microfinance institutions in Mombasa County, Kenya. The proportionate stratified random sampling technique was utilized to select a sample size of 44 branch managers and 44 operations managers of 44 microfinance institutions. The unit of analysis consisted of the microfinance institution, while the unit of observation consisted of the branch manager and operations manager. A pilot study was conducted to ascertain the validity and reliability of the constructed survey questionnaire. The pilot trial sample size of 16 branch managers and 16 operations managers of 16 microfinance institutions in Mombasa County, Kenya. The pilot study results suggested that the items in the developed survey questionnaire passed the validity test and reliability test. A cross-sectional survey-based approach was used to collect primary data. With the help of 3 research assistants, the researcher utilized the drop and pick method to distribute a total of 88 survey questionnaires. Out of the 88 survey questionnaires distributed, only 75 usable survey questionnaires were received. Therefore, there was a valid response rate of 85.2%, which was sufficient for data analysis and reporting purposes. The collected data were processed and entered into the statistical