Working Capital Management and Financial Performance of Deposit Taking Microfinance Institutions in Kenya

Maureen Goe Chipa, Dr. Johnbosco M. Kisimbii (PhD)

Abstract


Purpose of the study: To determine the effect of working capital management on financial performance of deposit taking microfinance institutions (DTMFIs) in Kenya.

Methodology: The descriptive-correlational research design was used on 14 DTMFIs in Kenya that existed between 2019 and 2023. Through data collection schedule, this study collected annual unbalanced panel secondary data from bank supervision reports from the CBK website. Descriptive and regression analysis was done. This study adopted an unbalanced panel regression model to establish the effect of WCM on financial performance of DTMFIs.

Results: Working capital management had a positive regression coefficient (?=0.925; p=0.003) indicating a positive effect.  Capital adequacy also showed a positive effect (?=0.065; p=0.009). On the other hand, non-performing loans had a negative effect on financial performance (?=-0.171; p=0.000). However, capital structure as measured by debt ratio indicated a positive but insignificant effect on financial performance (?=4.651; p=0.242).

Conclusion: The study concluded that   working capital management and capital adequacy have a positive effect on financial performance of DTMFIs in Kenya.  It also concludes that non-performing loans have a negative effect on financial performance of DTMFIs in Kenya while capital structure as measured by debt ratio has no significant effect on financial performance of DTMFIs in Kenya.

Recommendation: The study recommends that DTMFIs maintain an appropriate working capital ratio; reduce default rates; optimize their capital structure; and maintain a strong capital base for improved financial performance. Further research is recommended similar researches based on other firms, other factors, different measures of variables and balanced semi-annual or quarterly data.

Keywords: Working Capital Management, Non-Performing Loans, Capital Structure, Capital Adequacy, Financial Performance, Deposit Taking Microfinance Institutions


Full Text:

PDF

References


Abdulnafea, A. L., Almasria, N. A., & Alawaqleh, Q. (2022). The effect of WCM and credit management policy on Jordanian banks’ financial performance. Banks and Bank Systems, 16(4), 229-239.

Acharya, V. V., & Richardson, M. P. (2009). Restoring financial stability: How to repair a failed system. Wiley.

Agyei, J., Sun, S., & Abrokwah, E. (2020). Trade-off theory versus pecking order theory: Ghanaian evidence. Sage Open, 10(3), 215-224.

Ahmed, A. Y. (2022). Working capital management and financial performance of small and medium enterprises in Garissa County, Kenya (Doctoral dissertation, Doctoral dissertation, Kenyatta University).

Almomani, T. M., Almomani, M. A., & Obeidat, M. I. (2021). The relationship between WCM and financial performance: evidence from Jordan. The Journal of Asian Finance, Economics and Business, 8(6), 713-720.

Amponsah-Kwatiah, K., & Asiamah, M. (2021). WCM and profitability of listed manufacturing firms in Ghana. International Journal Of Productivity And Performance Management, 70(7), 1751-1771.

Arhinful, R., Mensah, L., & Owusu-Sarfo, J. S. (2023). The Impact of capital structure on the financial performance of financial institutions in Ghana. International Journal of Finance and Banking Research, 9(2), 19-29.

Ayange, A., Emmanuel, N. C., Rosemary, I. H., Ndudi, U. C., & Samuel, U. E. (2021). Effect of capital structure on firms’ performance in Nigeria. Universal Journal of Accounting and Finance, 9(1), 15-23.

Baker, H. K., Filbeck, G., & Barkley, T. (2023). WCM: an overview. WCM: Concepts And Strategies, 1(1), 3-19.

Berrospide, J. M., & Edge, R. M. (2010). The effects of bank capital on lending: What do we know? Journal of Financial Intermediation, 19(4), 549-576.

Boisjoly, R. P., Conine Jr, T. E., & McDonald IV, M. B. (2020). WCM: Financial and valuation impacts. Journal of Business Research, 108(1), 1-8.

Brigham, E. F., & Ehrhardt, M. C. (2016). Financial management: theory and practice (15th ed.). Cengage Learning.

Brownbridge, M. (1998). The Causes of Financial Distress in Local Banks in Africa and Implications for Prudential Policy. UNCTAD/OSG/DP/132. United Nations Conference on Trade and Development.

Budiarto, A. (2021). The impact of non-performing loans towards financial performance of BPR in Central Java, the role of empathy credit risk. In 4th International Conference on Sustainable Innovation 2020-Accounting and Management (ICoSIAMS 2020) (pp. 251-258). Atlantis Press.

Bukwimba, M. L., & Ngata, C. E. (2022). The effect of working capital on firm financial performance management in the united republic of Tanzania. International Journal of Finance and Accounting, 1(1), 29-38.

Caprio, G., & Klingebiel, D. (2002). Episodes of systemic and borderline financial crises. In P. Honohan & L. Laeven (Eds.), Systemic financial crises: Containment and resolution (pp. 31-49). Cambridge: Cambridge University Press.

Choiriyah, C., Fatimah, F., Agustina, S., & Ulfa, U. (2020). The effect of return on assets, return on equity, net profit margin, earning per share, and operating profit margin on stock prices of banking companies in Indonesia Stock Exchange. International Journal of Finance Research, 1(2), 103-123.

Dao, B. (2020). Bank capital adequacy ratio and bank performance in Vietnam: A simultaneous equations framework. Journal of Asian Finance, Economics and Business, 7(6), 039-046.

Ekinci, R., & Poyraz, G. (2019). The effect of credit risk on financial performance of deposit banks in Turkey. Procedia computer science, 158(1), 979-987.

Fligstein, N. (2021). Organizations: theoretical debates and the scope of organizational theory. Handbook of Classical Sociological Theory, 487-506.

Frank, M. Z., & Goyal, V. K. (2003). Testing the pecking order theory of capital structure. Journal of Financial Economics, 67(2), 217-248.

Gabriel, O., Victor, I. E., & Innocent, I. O. (2019). Effect of non-performing loans on the financial performance of commercial banks in Nigeria. American International Journal of Business and Management Studies, 1(2), 1-9.

Gitman, L. J. (2010). Principles of managerial finance (13th ed.). London: Pearson.

Kaplan, R. S., & Norton, D. P. (2001). The strategy-focused organization: How balanced scorecard companies thrive in the new business environment. Harvard Business Review Press.

Kathuri, P. (2022). Effect of non-performing loans on financial performance of deposit taking microfinance institutions in Kenya (Doctoral dissertation, University of Nairobi).

Khoa, B. T., & Thai, D. T. (2021). Capital structure and trade-off theory: Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 8(1), 45-52.

Kori, B. W., Muathe, S., & Maina, S. M. (2020). Financial and non-financial measures in evaluating Performance: the role of strategic intelligence in the context of commercial banks in Kenya. International Business Research, 13(10), 130-145.

Lee, M. T., & Suh, I. (2022). Understanding the effects of environment, social, and governance conduct on financial performance: arguments for a process and integrated modelling approach. Sustainable Technology and Entrepreneurship, 1(1), 100-114.

Liyana, L., & Indrayani, E. (2020). The effect of non-performing loan (NPL), loan to deposit ratio (LDR) and net interest margin (NIM) on financial performance (ROA) with car as intervening variables on go public commercial banks in Indonesia and listed on BEI Period 2014-2018. Asian Journal of Social Science and Management Technology, 2(2), 61-75.

López-Espinosa, M. J., & García-Cestona, M. Á. (2014). Capital adequacy and risk management in the banking industry. Journal of Banking & Finance, 38(1), 19-31.

Louzis, D. P., Vouldis, A. T., & Metaxas, V. L. (2012). Macroeconomic and bank-specific determinants of non-performing loans in Greece: A comparative study of mortgage, business and consumer loan portfolios. Journal of Banking & Finance, 36(4), 1012-1027.

Mandipa, G., & Sibindi, A. B. (2022). Financial performance and WCM practices in the retail sector: empirical evidence from South Africa. Risks, 10(3), 63-79.

Michalski, G. (2023). Cash management and models. WCM: Concepts And Strategies, 1(1), 117-136.

Modigliani, F., & Miller, M. H. (1958). The cost of capital, corporation finance and the theory of investment. The American Economic Review, 48(3), 261-297.

Mulajje, M. (2019). WCM and financial performance of small and medium enterprises in Kampala Capital City Authority: a case study of Kawempe division urban council (Doctoral dissertation, Kyambogo University).

Munyasia, G. O. (2023). The effect of credit risk management on the financial performance of deposit taking microfinance institutions in Kenya (Doctoral dissertation, University of Nairobi).

Myers, S. C. (1984). The capital structure puzzle. The Journal of Finance, 39(3), 575-592.

Ngoc, N. M., Tien, N. H., & Thu, T. H. (2021). The impact of capital structure on financial performance of logistic service providers listed on Ho Chi Minh City stock exchange. PalArch's Journal of Archaeology of Egypt/Egyptology, 18(2), 688-719.

Ngumo, K. O. S., Collins, K. W., & David, S. H. (2020). Determinants of financial performance of microfinance banks in Kenya. arXiv preprint arXiv:2010.12569.

Nguyen, C. T. (2020). Impact of WCM on firm performance in different business cycles: Evidence from Vietnam. The Journal of Asian Finance, Economics and Business, 7(12), 863-867.

Nguyen, T., & Nguyen, H. (2020). Capital structure and firm performance of non-financial listed companies: Cross-sector empirical evidences from Vietnam. Accounting, 6(2), 137-150.

Nyabaga, R. M. I., & Wepukhulu, J. M. (2020). Effect of firm characteristics on financial performance of listed commercial banks in Kenya. International Journal of Economics and Financial Issues, 10(3), 255-264.

Pandey, I. M. (2015). Financial management (11th ed.). Vikas Publishing House.

Pham, C. D. (2020). The effect of capital structure on financial performance of Vietnamese listing pharmaceutical enterprises. The Journal of Asian Finance, Economics and Business, 7(9), 329-340.

Rafi, M. A., Ahmed, E., Natasha, M. T., Mahruf, R., & Ahmed, F. (2020). Financial performance analysis of some selected investment banks of Bangladesh. Journal of Internet Banking and Commerce, 25(3), 1-13.

Saro, J. M., Apat, J. Q., & Pareja, M. S. (2023). A descriptive-correlational study of the teachers’ motivation, competences, and perceptions in writing action research. J Adv Educ Philos, 7(1), 14-24.

Seeram, E. (2019). An overview of correlational research. Radiologic technology, 91(2), 176-179.

Shaik, M. B., Kethan, M., Rani, I., Mahesh, U., Harsha, C. S., Navya, M. K., & Sravani, D. (2022). Which determinants matter for capital structure? an empirical study on NBFC'S in India. International Journal of Entrepreneurship, 26, 1-9.

Shapiro, A. C. (2013). Modern corporate finance: Theory and practice (4th ed.). Pearson.

Tyson, L. (2023). Critical theory today: A user-friendly guide. London: Routledge.

Uhrenholt, J. N., Kristensen, J. H., Rincón, M. C., Jensen, S. F., & Waehrens, B. V. (2022). Circular economy: Factors affecting the financial performance of product take-back systems. Journal of Cleaner Production, 335(1), 130319.

Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of financial management (13th ed.). Pearson.

Vernimmen, P., Quiry, P., & Le Fur, Y. (2022). Corporate finance: theory and practice. John Wiley & Sons.

Wambia, W. O., & Jagongo, A. (2020). The effects of WCM practices on the financial performance of insurance companies in Kenya. International Academic Journal of Economics and Finance, 3(5), 103-120.

Zalaghi, H., & Godini, M. (2019). The moderating role of firm’s characteristics on the relationship between WCM and financial performance. Advances in Mathematical Finance and Applications, 1(1), 71-92.


Refbacks

  • There are currently no refbacks.