FINANCIAL LEVERAGE, INCOME DIVERSIFICATION AND FINANCIAL SUSTAINABILITY OF MFIS IN KENYA
Abstract
Background: Microfinance institutions are essential for promoting economic development and ensuring financial inclusion. Financial sustainability is crucial for the expansion of microfinance institutions and their ability to serve underprivileged borrowers.
Research Objective: The primary aim of this study was to determine the impact of financial leverage on the financial stability of MFIs, and to examine how revenue diversification influences this relationship.
Methodology: The study was conducted based on the pecking order theory and the contemporary portfolio theory. Data was collected from 32 Microfinance Institutions (MFIs) over 2010-2019.
Results and Findings: The study revealed that financial leverage has a negative and significant effect on the financial sustainability of MFIs. Conversely, income diversification had a positive effect on the financial sustainability of the MFI. Furthermore, the between the use of financial leverage and the diversification of income has an adverse effect on the financial MFIs.
Conclusions and Recommendations: The study advised that managers of Microfinance Institutions (MFIs) should have a clear understanding of the negative effect of debt financing on the MFIs' endeavours to achieve sustainability. Additionally, it is crucial for managers to comprehend the detrimental impact that arises from the interplay between leverage and non-interest earning activities. The results have significant implications for management of MFIs and policymakers, considering their crucial role in service delivery and the constraints that prohibit the sector from achieving financial sustainability in the economy.
Keywords: Microfinance, Financial Sustainability, Leverage, Income Diversification, Kenya.
References
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Bayai, I., & Ikhide, S. (2018). Financing structure and financial sustainability of selected SADC microfinance institutions (MFIs). Annals of Public and Cooperative Economics, 89(4), 665-696.
Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102.
Berger, P. G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of financial economics, 37(1), 39-65.
Bibi, R., Raza, N., & Javid, A. Y. (2022). Impact of capital structure on performance of microfinance institutions. Business Review, 17(1), 106-127.
Bich, N. N. (2016). The effect of capital structure and legal status on financial sustainability of mfis in developing countries. Review of Business and Economics Studies, (2), 53-64.
Bogan, V. L. (2012). Capital structure and sustainability: An empirical study of microfinance institutions. Review of Economics and statistics, 94(4), 1045-1058.
Bogan, V., Johnson, W., & Mhlanga, N. (2007). Does Capital Structure affect the financial sustainability of Microfinance Institutions. Retrieved on, 7(04), 2013.
Chauhan, S. (2021). Social and financial efficiency: A study of Indian microfinance institutions. IIM Kozhikode Society & Management Review, 10(1), 31-43.
Chikalipah, S. (2019). Optimal sources of financing for microfinance institutions in sub-Saharan Africa. Development in Practice, 29(3), 395-405.
Dabi, R. S. K., Nugraha, Disman, & Sari, M. (2023). Capital structure, financial performance and sustainability of Microfinance Institutions (MFIs) in Ghana. Cogent Economics & Finance, 11(2), 2230013.
Farooq, M. O., Miah, M. D., Kabir, M. N., & Hassan, M. K. (2023). The impact of banks’ capital buffer on equity return: evidence from Islamic and conventional banks of GCC countries. Journal of Islamic Accounting and Business Research. Preprint
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Githaiga, P. N. (2022). Income diversification and bank risk-taking: The moderating role of intellectual capital. Cogent Business & Management, 9(1), 2149142.
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Githaiga, P. N., & Bitok, S. K. (2023). Financial leverage, percentage of female borrowers and financial sustainability of microfinance institutions. Journal of Economic and Administrative Sciences.
Goddard, J., McKillop, D., & Wilson, J. O. (2008). The diversification and financial performance of US credit unions. Journal of banking & finance, 32(9), 1836-1849.
Hartarska, V., & Nadolnyak, D. (2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied economics, 39(10), 1207-1222.
Hossain, M. S., & Khan, M. A. (2016). Financial sustainability of microfinance institutions (MFIs) of Bangladesh. Developing Country Studies, 6(6), 69-78.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review.
Jouida, S., & Hellara, S. (2018). Diversification, capital structure, and performance: A simultaneous equation approach. Managerial and Decision Economics, 39(2), 117-130.
Khachatryan, K., Hartarska, V., & Grigoryan, A. (2017). Performance and capital structure of microfinance institutions in Eastern Europe and Central Asia. Eastern European Economics, 55(5), 395-419.
Khalaf, L., Kouki, R., & Algebaly, E. A. M. (2023). The bidirectional relationship between MFIs’ financial and social performance: Sustainability and outreach perspective. Cogent Economics & Finance, 11(1), 2173123.
Kinde, B. A. (2012). Financial sustainability of microfinance institutions (MFIs) in Ethiopia. European Journal of business and Management, 4(15), 1-10.
Kipesha, E. F., & Zhang, X. (2013). Sustainability, profitability and outreach tradeoffs: evidences from microfinance institutions in East Africa. European Journal of Business and Management, 5(8),136-148.
Kochhar, R. (1996). Explaining firm capital structure: The role of agency theory vs. transaction cost economics. Strategic Management Journal, 17(9), 713-728.
Kochhar, R. (1997). Strategic assets, capital structure, and firm performance. Journal of Financial and Strategic decisions, 10(3), 23-36.
Kochhar, R., & Hitt, M. A. (1998). Linking corporate strategy to capital structure: Diversification strategy, type and source of financing. Strategic management journal, 19(6), 601-610.
Kwok, C. C., & Reeb, D. M. (2000). Internationalization and firm risk: An upstream-downstream hypothesis. Journal of international business studies, 31, 611-629.
La Rocca, M., La Rocca, T., Gerace, D., & Smark, C. (2009). Effect of diversification on capital structure. Accounting & Finance, 49(4), 799-826.
Lewellen, W. G. (1971). A pure financial rationale for the conglomerate merger. The journal of Finance, 26(2), 521-537.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of banking & finance, 34(3), 621-632.
Meckling, W. H., & Jensen, M. C. (1976). Theory of the Firm. Managerial Behavior, Agency Costs and Ownership Structure.
Mia, M. A., & Lee, H. A. (2017). Mission drift and ethical crisis in microfinance institutions: What matters?. Journal of cleaner production, 164, 102-114.
Monteforte, D., & Staglianò, R. (2015). Firm complexity and capital structure: Evidence from Italian diversified firms. Managerial and decision economics, 36(4), 205-220.
Naz, F., Salim, S., Rehman, R. U., Ahmad, M. I., & Ali, R. (2019). Determinants of financial sustainability of microfinance institutions in Pakistan. Управленец, 10(4), 51-64.
Olaoye, C. O., & Adesina, O. D. (2022). Capital Structure and Financial Performance of Manufacturing Companies in Nigeria. Journal of Applied And Theoretical Social Sciences, 4(4), 471-491.
Parvin, G. A., Istiak, M. S., Raihan, M. L., Chumky, T., Shumi, K. F., & Basu, M. (2022). Microfinance and climate change: Global and Bangladesh perspectives. In Handbook on Climate Change and Disasters (pp. 353-368). Edward Elgar Publishing.
Rutanga, J. M., Barayandema, J., & Mutarindwa, S. (2021). Capital structure and financial sustainability of Microfinance Institutions (MFIs) in Rwanda. Rwanda Journal of Social Sciences, Humanities and Business, 2(1), 6-26.
Sekabira, H. (2013). Capital structure and its role on performance of microfinance institutions: The Ugandan case. Sustainable Agriculture Research, 2(3). 86-100.
Singh, M., & Nejadmalayeri, A. (2004). Internationalization, capital structure, and cost of capital: evidence from French corporations. Journal of multinational financial management, 14(2), 153-169.
Sorokina, N. Y., Thornton Jr, J. H., & Patel, A. (2017). Why do banks choose to finance with equity?. Journal of Financial Stability, 30, 36-52.
Tehulu, T. A. (2013). Determinants of financial sustainability of microfinance institutions in East Africa. European Journal of Business and Management, 5(17), 152-158.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.
Winton, A. (1999). Don't put all your eggs in one basket? Diversification and specialization in lending. Diversification and Specialization in Lending (September 27, 1999).
Ayayi, A. G., & Sene, M. (2010). What drives microfinance institution's financial sustainability. The Journal of Developing Areas, 303-324.
Ayele, G. T. (2015). Microfinance institutions in Ethiopia, Kenya and Uganda: Loan outreach to the poor and the quest for financial viability. African Development Review, 27(2), 117-129.
Barton, S. L., & Gordon, P. I. (1987). Corporate strategy: useful perspective for the study of capital structure?. Academy of Management Review, 12(1), 67-75.
Bayai, I., & Ikhide, S. (2018). Financing structure and financial sustainability of selected SADC microfinance institutions (MFIs). Annals of Public and Cooperative Economics, 89(4), 665-696.
Berger, A. N., & Di Patti, E. B. (2006). Capital structure and firm performance: A new approach to testing agency theory and an application to the banking industry. Journal of Banking & Finance, 30(4), 1065-1102.
Berger, P. G., & Ofek, E. (1995). Diversification's effect on firm value. Journal of financial economics, 37(1), 39-65.
Bibi, R., Raza, N., & Javid, A. Y. (2022). Impact of capital structure on performance of microfinance institutions. Business Review, 17(1), 106-127.
Bich, N. N. (2016). The effect of capital structure and legal status on financial sustainability of mfis in developing countries. Review of Business and Economics Studies, (2), 53-64.
Bogan, V. L. (2012). Capital structure and sustainability: An empirical study of microfinance institutions. Review of Economics and statistics, 94(4), 1045-1058.
Bogan, V., Johnson, W., & Mhlanga, N. (2007). Does Capital Structure affect the financial sustainability of Microfinance Institutions. Retrieved on, 7(04), 2013.
Chauhan, S. (2021). Social and financial efficiency: A study of Indian microfinance institutions. IIM Kozhikode Society & Management Review, 10(1), 31-43.
Chikalipah, S. (2019). Optimal sources of financing for microfinance institutions in sub-Saharan Africa. Development in Practice, 29(3), 395-405.
Dabi, R. S. K., Nugraha, Disman, & Sari, M. (2023). Capital structure, financial performance and sustainability of Microfinance Institutions (MFIs) in Ghana. Cogent Economics & Finance, 11(2), 2230013.
Farooq, M. O., Miah, M. D., Kabir, M. N., & Hassan, M. K. (2023). The impact of banks’ capital buffer on equity return: evidence from Islamic and conventional banks of GCC countries. Journal of Islamic Accounting and Business Research. Preprint
Frank, M. Z., & Goyal, V. K. (2008). Trade-off and pecking order theories of debt. Handbook of empirical corporate finance, 135-202.
Githaiga, P. N. (2022). Income diversification and bank risk-taking: The moderating role of intellectual capital. Cogent Business & Management, 9(1), 2149142.
Githaiga, P. N. (2022). Revenue diversification and financial sustainability of microfinance institutions. Asian Journal of Accounting Research, 7(1), 31-43.
Githaiga, P. N., & Bitok, S. K. (2023). Financial leverage, percentage of female borrowers and financial sustainability of microfinance institutions. Journal of Economic and Administrative Sciences.
Goddard, J., McKillop, D., & Wilson, J. O. (2008). The diversification and financial performance of US credit unions. Journal of banking & finance, 32(9), 1836-1849.
Hartarska, V., & Nadolnyak, D. (2007). Do regulated microfinance institutions achieve better sustainability and outreach? Cross-country evidence. Applied economics, 39(10), 1207-1222.
Hossain, M. S., & Khan, M. A. (2016). Financial sustainability of microfinance institutions (MFIs) of Bangladesh. Developing Country Studies, 6(6), 69-78.
Jensen, M. C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review.
Jouida, S., & Hellara, S. (2018). Diversification, capital structure, and performance: A simultaneous equation approach. Managerial and Decision Economics, 39(2), 117-130.
Khachatryan, K., Hartarska, V., & Grigoryan, A. (2017). Performance and capital structure of microfinance institutions in Eastern Europe and Central Asia. Eastern European Economics, 55(5), 395-419.
Khalaf, L., Kouki, R., & Algebaly, E. A. M. (2023). The bidirectional relationship between MFIs’ financial and social performance: Sustainability and outreach perspective. Cogent Economics & Finance, 11(1), 2173123.
Kinde, B. A. (2012). Financial sustainability of microfinance institutions (MFIs) in Ethiopia. European Journal of business and Management, 4(15), 1-10.
Kipesha, E. F., & Zhang, X. (2013). Sustainability, profitability and outreach tradeoffs: evidences from microfinance institutions in East Africa. European Journal of Business and Management, 5(8),136-148.
Kochhar, R. (1996). Explaining firm capital structure: The role of agency theory vs. transaction cost economics. Strategic Management Journal, 17(9), 713-728.
Kochhar, R. (1997). Strategic assets, capital structure, and firm performance. Journal of Financial and Strategic decisions, 10(3), 23-36.
Kochhar, R., & Hitt, M. A. (1998). Linking corporate strategy to capital structure: Diversification strategy, type and source of financing. Strategic management journal, 19(6), 601-610.
Kwok, C. C., & Reeb, D. M. (2000). Internationalization and firm risk: An upstream-downstream hypothesis. Journal of international business studies, 31, 611-629.
La Rocca, M., La Rocca, T., Gerace, D., & Smark, C. (2009). Effect of diversification on capital structure. Accounting & Finance, 49(4), 799-826.
Lewellen, W. G. (1971). A pure financial rationale for the conglomerate merger. The journal of Finance, 26(2), 521-537.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of banking & finance, 34(3), 621-632.
Meckling, W. H., & Jensen, M. C. (1976). Theory of the Firm. Managerial Behavior, Agency Costs and Ownership Structure.
Mia, M. A., & Lee, H. A. (2017). Mission drift and ethical crisis in microfinance institutions: What matters?. Journal of cleaner production, 164, 102-114.
Monteforte, D., & Staglianò, R. (2015). Firm complexity and capital structure: Evidence from Italian diversified firms. Managerial and decision economics, 36(4), 205-220.
Naz, F., Salim, S., Rehman, R. U., Ahmad, M. I., & Ali, R. (2019). Determinants of financial sustainability of microfinance institutions in Pakistan. Управленец, 10(4), 51-64.
Olaoye, C. O., & Adesina, O. D. (2022). Capital Structure and Financial Performance of Manufacturing Companies in Nigeria. Journal of Applied And Theoretical Social Sciences, 4(4), 471-491.
Parvin, G. A., Istiak, M. S., Raihan, M. L., Chumky, T., Shumi, K. F., & Basu, M. (2022). Microfinance and climate change: Global and Bangladesh perspectives. In Handbook on Climate Change and Disasters (pp. 353-368). Edward Elgar Publishing.
Rutanga, J. M., Barayandema, J., & Mutarindwa, S. (2021). Capital structure and financial sustainability of Microfinance Institutions (MFIs) in Rwanda. Rwanda Journal of Social Sciences, Humanities and Business, 2(1), 6-26.
Sekabira, H. (2013). Capital structure and its role on performance of microfinance institutions: The Ugandan case. Sustainable Agriculture Research, 2(3). 86-100.
Singh, M., & Nejadmalayeri, A. (2004). Internationalization, capital structure, and cost of capital: evidence from French corporations. Journal of multinational financial management, 14(2), 153-169.
Sorokina, N. Y., Thornton Jr, J. H., & Patel, A. (2017). Why do banks choose to finance with equity?. Journal of Financial Stability, 30, 36-52.
Tehulu, T. A. (2013). Determinants of financial sustainability of microfinance institutions in East Africa. European Journal of Business and Management, 5(17), 152-158.
Titman, S., & Wessels, R. (1988). The determinants of capital structure choice. The Journal of finance, 43(1), 1-19.
Winton, A. (1999). Don't put all your eggs in one basket? Diversification and specialization in lending. Diversification and Specialization in Lending (September 27, 1999).
Published
2024-11-07
How to Cite
Talel, L., Korir , S., & Otuya, R. (2024). FINANCIAL LEVERAGE, INCOME DIVERSIFICATION AND FINANCIAL SUSTAINABILITY OF MFIS IN KENYA. African Journal of Emerging Issues, 6(19), 59 - 72. Retrieved from https://ajoeijournals.org/sys/index.php/ajoei/article/view/712
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