Financial Leverage And Profitability Among Deposit-Taking Microfinance Institutions In Nairobi City County, Kenya

ABSTRACT

Very few deposit-taking microfinance institutions in Kenya are profitable. Most of them report loses in every financial year. The making of the losses may be a result of inefficiency in financial leverage, thus formed the foundation of the study that investigated the effect of financial leverage on profitability in deposit-taking microfinance institutions in Nairobi City County, Kenya. The specific objectives of the study were the effect of short term debt, long term debt and the equity ratio on profitability in deposit-taking microfinance institutions in Nairobi City County and also to establish the moderating effect of firm size on the relationship between the financial leverage and profitability in deposit-taking microfinance institutions in Nairobi City County. The study was anchored on four theories, namely pecking order theory, agency cost theory, Modigliani and Miller theorem and growth of the firm theory. Furthermore, the study adopted the positivistic approach and a panel regression model was employed to analyze the effects of financial leverage and profitability in deposit-taking microfinance institutions in Nairobi City. The targeted population was 12 deposit-taking microfinance institutions in Nairobi City County. The data was collected for the period between 2014 and 2018. Moreover, the study was conducted a census of all the 12 deposit-taking microfinance institutions in Kenya and the secondary data was used in the study. The data was analyzed using descriptive and inferential statistics. The descriptive statistics was presented in mean, standard deviation, minimum and maximum while the inferential statistics included the diagnostics tests, correlation and regression models. The findings of the study showed that short term debt ratio and profitability were positively and significantly associated. Long term debt ratio was positively and significantly associated with profitability. Also, the equity ratio was positively and significantly correlated to profitability. Finally, firm size was positively and significantly associated with profitability. On the regression analysis, it was found that short term debt and equity ratio was positively and significantly related with profitability. Long term debt was negatively and significantly related to the profitability. Firm size moderated the relationship between financial leverage and profitability of deposit taking microfinance institutions in Nairobi. The study concluded that short term debt and equity ratio were positively and significantly related to the profitability while long term debt was negatively and significantly related to profitability. The study recommended for deposit taking microfinance institutions to use short term debt and equity financing to finance their assets since it was found to positively affect the profitability whereas to keep off from the long term debt since it deteriorates their profits.