Influence Of Financial Leverage Alternatives On Performance Of Microfinance Institutions In Kenya. A Moderating Role Of Firm Size

Abstract

Financial leverage and how it affects a firm's performance have been the subject of decades of discussion. The main objective of this study was to ascertain the underlying influence of financial leverage decisions on the financial results of MFIs in Kenya, with a particular emphasis on the company's size as a moderating component. The specific goals were to ascertain the reducing impact of firm size on the connection between financial leverage alternatives and the performance of Kenyan MFIs, as well as the effects of the financial leverage components (debt to equity, debt to capital, debt to asset, and debt to EBITDA ratio) as well as their influence on MFIs' performance. The research philosophy used in the study was positivism, and it was guided by the Modigliani along with Miler Theory. Thirteen microfinance banks made up the sample size of this longitudinal study, which was carried out in Kenya between 2011 and 2020 and had 53 MFIs as its target population. Secondary data was gathered using data collection sheets. To analyse the data, descriptive statistical techniques were applied. Using SPSS version 22, the data was analysed and displayed using tables, frequencies, and graphs. Inferential statistical methods such as the number of cases, maximum, minimum, means, and standard deviation were utilised. The hypothesis was tested and the study's degree of significance was determined using ANOVA procedures. To evaluate the strength of the association between the variables, Pearson's product moment correlation coefficient was employed. In order to ascertain the relationship between the study variables, a trend analysis on the MFIs was carried out. A hierarchical regression panel data model was then used to ascertain the moderating impact of firm size on the connection between the independent and dependent variables. The study's findings demonstrated that, although the debt to capital and debt to EBITDA ratios had a weak, positive, and statistically significant relationship with MFI performance in Kenya, the debt to equity as well as debt to asset ratios had a positive, moderate, as well as statistically significant relationship with MFI performance in Kenya. The relationship between financial leverage alternatives and MFI performance in Kenya was shown to be moderated by company size in a statistically meaningful way. The study indicated that financial leverage choices had a statistically significant effect on performance, refuting all of the null hypotheses in the process, with firm size acting as the moderating variable. Lastly, various recommendations were drawn; Future studies to consider other moderator variables such as age of the firm, Influence of other forms of leverage such as operating leverage and combined leverage and their effect on performance of MFIs in Kenya, that other studies be done on cross-sectional basis using primary data or mixed research methodology and also consider use of different clusters of MFIs as sample size to compare results.