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International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
Page | 295
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INFLUENCE OF FINANCIAL
PERFORMANCE ON FINANCIAL
SUSTAINABILITY OF MICROFINANCE
INSTITUTIONS IN KENYA
1Dinah Nabwonya Wafula, 2Dr. Shedrack Mbithi Mutua, 3Mr. Maniagi Gerald Musiega
1Masters Student, Jomo Kenyatta University of Agriculture and Technology, Kakamega CBD campus, Kenya.
2Lecturer, Jomo Kenyatta University of Agriculture and Technology, Kakamega CBD campus, Kenya.
3Lecturer, Masinde Muliro University of Science and Technology, Kenya
Abstract: The study sought to find out the influence of financial performance on financial sustainability of MFIs.
This study was conducted through descriptive survey research design. The specific objective was to find out the
determinants of financial sustainability of micro finance institutions in Kenya. The target population of this study
was all the microfinance institutions in Kenya. A list of all the 44 Microfinance Institutions obtained from the
Association of Microfinance Institution formed the sampling frame. Census technique was used because of their
small numbers in the population. Linear regression was also carried out to establish into determinants of financial
sustainability of microfinance institutions in Kenya. The study used SPSS version (20) to conduct analysis. The
study concluded that financial performance was positively but insignificantly associated with financial
sustainability. The study also concluded that there exist a positive relationship between financial performance and
financial sustainability. Improving financial performance would improve the financial sustainability as this
facilitates asset growth. Increased profits lead to increased concentration which leads to sustainability.
Keywords: financial performance, financial sustainability, microfinance institutions.
1. INTRODUCTION
Financial sustainability of microfinance institutions is probably the key dimension of microfinance sustainability.
Moreover, it is observed that microfinance organizations have had various degrees of sustainability; one such
sustainability is the Financial Sustainability (Rai, 2012). According to Kinde (2012) there are two kinds of Financial
Sustainability that one could observe in assessing microfinance institution performance are Operational self-sustainability
(OSS) and financial self-sustainability (FSS).
Operational Self-Sufficiency indicates whether enough revenue has been earned to cover the MFI’s direct costs, excluding
the cost of capital but including actual financing costs (Nyamsogoro, 2010). Financial self-sufficiency on the other hand
portrays the actual financial health of MFIs. Thus, FSS includes the cost of capital (adjusted) apart from the components
in OSS. He also indicated that measuring financial sustainability requires that MFIs maintain good financial accounts and
follow recognized accounting practices that provide full transparency for income, expenses, loan recovery, and potential
losses (Kelegama, 2011).
The three stages of sustainability namely survival mode, sustainability, and self-sufficiency were also identified by
(Polinger & outhwaite, 2010). In survival mode MFIs barely cover the costs while in sustainability mode, costs are
covered using donations and other grants where as in self‐sufficiency the income generated will cover all costs (Reid,
2010). They presented five supporting arguments for MFIs to be sustainable. The first two points are that sustainability
ensures the survival of the organizations and those MFIs that price products at market levels will be able to attract the
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
Page | 296
Research Publish Journals
target, non‐bankable population. Also traditional lenders may not compete with organizations that enjoy subsidies and
that sustainability helps obtain capital from various sources. Lastly, a focus on self‐sufficiency will help MFIs control
costs (Ongaki, 2012).
Globally financial sustainability of MFIs is a necessary condition for institutional sustainability (Ongaki, 2012).
According to Nyamsogoro (2010) it is better not to have MFIs than having unsustainable ones indicating how important
the sustainability of MFIs is. Sri Lanka is well known for its significant improvements in human development indicators
as it is the fact, Sri Lanka remains a low income country and that the micro finance sector in Sri Lanka has grown to
enviable levels and most of the MFIs are deemed financially sustainable (Kelegama, 2011). Though finance is a
prerequisite for the economic empowerment, inability to access formal finance has become a critical concern in this
regard (Reid, 2010).
East Africa is the least developed region in terms of social economic development (Kinde, 2012). Interventions through
the delivery of microfinance services are considered as one of the policy instruments of their governments to leverage the
economy. For sustainable economies, the MFIs themselves should be financially sustainable (Hartarska, 2014). Given the
relation between the well-being of the microfinance sector and the goal of economic empowerment, knowledge of the
underlying factors that influence the sectors financial sustainability is therefore essential not only for the managers of the
MFIs, but for numerous stakeholders such as the central bank, governments, and other financial authorities (Yunus,
2010).
Microfinance institutions in Uganda are always often faced with high operating costs to provide financial services to the
people. As more microfinance institutions grow and become formal financial institutions, each Microfinance Institution
has a unique profile and operational structure that determines which types of controls are appropriate to increase financial
sustainability (Rahman & Mazlan, 2014).
Microfinance sector in Tanzania has recently experienced tremendous growth due to the increased number of firms
engaging in microfinance services including commercial Banks and other profit oriented firms (Ejigu, 2011). Recent
statistics shows that financial sustainability of micro finance institutions in Tanzania is has improved as more than half of
them are self-financed and highly efficient and effective in terms of costs and operations (Tehulu, 2013).
Microfinance sector in Kenya is organized into various categories which include regulated MFIs; commercial banks, non-
bank financial institutions (Post Bank), and the to-be regulated; transforming MFIs under MFIs Act; non-regulated; credit
only MFIs; financial wholesalers; micro-insurance providers and capacity providers/development institutions (Ongaki,
2012). A list of various categories of MFIs can be found from the Association of Microfinance Institutions (AMFI).
There are 44 are classified as microfinance institutions (AMFI, 2014).
Microfinance institutions in Kenya are regulated under The Microfinance Act (2006) and the Microfinance Regulations
issued there under sets out the legal, regulatory and supervisory framework (MF Act, 2006). According to Financial
Sector Deepening (2010) just 60% of Kenyans have access to banks or microfinance institutions with 30% of rural users
having no access to banking services at all. It further shows shortage in supply of financial services including credit when
compared to demand (Hartarska, 2014). Microfinance institutions fill a needed gap within the financial services industry
by offering small loans or micro-loans to people unable to access conventional loan services (Gatuhu, 2013). Therefore
this study seeks to establish the determinants of financial sustainability of MFIs in Kenya
1.1 Statement of the Problem
MFIs face the challenge of financial sustainability. In recent years, there has been increased internal and external pressure
for MFIs to decrease dependence on subsidized or grant funding (Nyaga, 2012). According to Ejigu (2011) consistent and
simultaneous provision of massive scale, permanence and continuous efficacy is only possible if MFIs would focus on
earning above average returns through doing business. Recent transformation of Faulu Kenya in May 2009 and Global
achievement of Equity bank in July 2009 attest to this trend (Obawale & Oladunjoye , 2013).
According to Kinde (2012) as the number of clients increase, liquidity of a microfinance institution increases hence
enjoying economies of scale and thus reduces costs which help them to be financially sustainable. However, Hulme and
Mosely (2010) argue that expanded MFI outreach increase transaction cost on seeking information about the clients
creditworthiness which makes MFIs financially unsustainable.
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
Page | 297
Research Publish Journals
The concept of social performance has seemed to overshadow the state of health of these Institutions. However, the
accepted criteria in a number of studies to study the performance of any MFI have been based on financial sustainability
of microfinance institutions (Gatuhu, 2013). It is from this perspective that the researcher sought to fill this knowledge
gap statistically using MFIs financial and operational data over the period (2010-2013).
1.2 Research Objective
To determine the influence of financial performance on financial sustainability of Microfinance Institutions in Kenya.
1.3 Research Question
What is the influence of financial performance on financial sustainability of Microfinance Institutions in Kenya?
2. LITERATURE REVIEW
2.1 Conceptual Framework
Conceptual framework is a hypothesized model identifying the model under study and the relationship between the
dependent and independent variables (Mugenda &Mugenda 2003). The goal of a conceptual framework is to categorize
and describe concepts relevant to the study and map relationships among them. Such a framework would help researchers
define the concept, map the research terrain or conceptual scope, systematize relations among concepts, and identify gaps
in literature (Kombo &Tromp, 2009). In this study, the independent variable is financial performance and the dependent
variable is financial sustainability of MFIs. The relationship is clearly shown below in figure
Fig 2.1: The Conceptual Framework
2.2 Review of Variables
2.2.1 Financial Performance
Financial performance of a microfinance institution is measured by Profitability and Return on Assets however
Profitability ratios are used to determine the financial institutions bottom line and are important to the managers and
owners (Gorton, 2012). According to Gorton (2012) and Schreiner (2013) focused on accounting measures of profitability
when examining managerial entrenchment and takeovers in Latin America.
According to Barclay (2012) discovered that profitability persist to a moderate extent. Persistence suggests that departures
from perfectly competitive market structures may not be large. The study further shows that all specific determinants,
with the exception of size, influence performance in the anticipated way (Barclay, 2010). A study by Ongaki (2012) to
examine the determinants of financial sustainability of deposit taking MFIs in Kenya, found that there is a positive
relationship between profitability and financial sustainability.
A study by Gregoire and Tuya (2016) established that profits are positively correlated with movements in the business
cycle. A study by Berger and Mester (2015) on investigating the profit structure relationship in banking in Australia,
providing tests of profitability on financial sustainability of microfinance institutions. To some extent, the relative market
power hypothesis was verified; since there was evidence that minimizing operational risks raise profits. In contrast, weak
evidence was found for the efficient structure hypothesis. It explained that efficiency not only raises profits, but may lead
to market share gains and, hence, increased concentration, so that the finding of a positive relationship between
concentration and profits could be a spurious result due to correlations with other variables (Berger, 2009).
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
Page | 298
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A study by Muriu (2011) to examine the determinants of financial sustainability of deposit taking MFIs, found that there
is a positive relationship between profitability and financial sustainability of micro finance institutions. Therefore, an
increase in profitability leads to an increase in financial sustainability.
2.2.2 Financial Sustainability of Microfinance Institutions
Financial Sustainability refers to the ability of a microfinance institution (MFI) to cover all of its costs through interest
and other income paid by its clients (Consultative group, 2012). MFIs are becoming more concerned with financial
sustainability. International foundations and donors have recognized that efficiently run MFIs can cover a large portion of
their costs, and demand an increasing level of self-sufficiency from them. According to Woller (2010) financial self-
sufficiency is a non-profit equivalent of profitability. Also Kinde (2012) noted that the poor needed to have access to
financial service on long-term basis rather than just a one-time financial support. Meyer also argued that financial
unsustainability arises from low repayment rate or un-materialization of funds promised by donors.
The few existing empirical literature on the performance and sustainability of microfinance offers mixed results. For
example the findings from Namibia concluded that almost all microfinance is not sustainable (Forbes, 2010). The study
was investigating leverage of the institutions, profitability and outreach as key determinants of financial sustainability of
microfinance institutions. A study on Nepal microfinance showed that most of rural microfinance institutions are not
sustainable (Acharya, 2015). This study examined among others operational expense, profitability and business risk as
determinants of financial sustainability of micro finance institutions. In this study financial self-sufficiency will be used as
a dependent variable since the study seeks to identify determinants of financial sustainability of MFIs.
3. RESEARCH METHODOLOGY
The descriptive survey design was used because according to Sekaran and Bougie (2011) this design enables one to
capture all pertinent aspects of a situation while employing a unit study and investigation. The researcher systematically
collected data, presented it, analyzed it and finally made conclusion and recommendations. The population of this study
was all the 44 microfinance institutions in Kenya. A list of all the 44 Microfinance Institutions obtained from the
Association of Microfinance Institution formed the sampling frame for the research .
The sample size for secondary data was determined by Census technique and thus the study therefore adopted a sample
size of 44 microfinance institutions. Microfinance institutions disclose their financial information through AMFI web
portal. The data collected for both the dependent and independent variables was adjusted ratios and averages derived from
the MFIs financial statements. A form for secondary data collection was then used to summarize relevant data on total
assets, total operating expenses, total debt, total equity, total operating expenses, net income, and total customer deposits
from the financial statements in order to calculate relevant ratios, descriptive measures and regression analysis.
Information was sorted, coded and input into the statistical package for social sciences (SPSS) version 20 for production
of graphs, tables, descriptive statistics and inferential statistics. A multiple regression model was used to test the
significance of the influence of the independent variables on the dependent variable. Correlation was used to test the
relationship of independent and dependent variables
Model:
Y = βo +β1X1 + ε
Where:
Y = Financial sustainability
β1 =Regression coefficient
X1= Financial performance
ε = standard error
βo= Constant term
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
Page | 299
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4. RESEARCH FINDINGS AND DISCUSSION
4.1 Descriptive Analysis
The study established the measures of central tendency (mean) and standard deviation of the variables. In addition, Jarque
Bera test was used to establish the normality of the variables so as to establish whether transformation of the variables
into logs was necessary. The null hypothesis for JB test is that the data is normally distributed
Table 4.1: Descriptive Analysis
FINANCIAL
SUSTAINABILITY
FINANCIAL
PERFORMANCE
Mean
1.358
0.049
Median
1.435
0.048
Maximum
1.632
0.057
Minimum
0.930
0.044
Std. Dev.
0.230
0.004
Skewness
-0.748
1.021
Kurtosis
2.512
3.554
Jarque-Bera
0.826
1.494
Probability
0.662
0.474
The study findings indicated that the mean return on asset recorded over the study period was 0.049 with a standard
deviation of 0.004 which indicated a small variation in the return on asset on MFIs over the study period. A JB statistic of
1.494 was not significant ( P value = 0.474). This implies that the null hypothesis of normality was not rejected at 5%
level of significance. The implication is that financial performance was normally distributed hence there was no need of
transformation into log.
Financial sustainability indicated a mean value of 1.358 over the study period with a standard deviation of 0.230 which
implied that there was a large variation in financial sustainability over the study period. Financial sustainability also had a
JB value of 0.826 which was not significant (P value = 0.662) at 95 level of confidence had failure to reject the null
hypothesis of normality. The study hence concluded that financial sustainability was normally distributed hence it was not
logged
4.2 Correlation analysis
The study used correlation analysis to investigate the association between the independent and the dependent variables
Table 4.2: Correlation Table
Financial performance
Financial sustainability
Financial performance
Pearson Correlation
1
0.065
Sig. (2-tailed)
0.000
0.879
Financial sustainability
Pearson Correlation
0.065
1
Sig. (2-tailed)
0.879
0.000
* Correlation is significant at the 0.05 level (2-tailed).
** Correlation is significant at the 0.01 level (2-tailed).
Financial performance had a positive correlation of 0.065. The p(0.879)>showing that financial performance is
insignificant to financial sustainability.
4.3 Regression Analysis
The relationship between the independent and dependent variable was established using regression models.
4.3.1 Financial performance
The results for model summary indicated on Table 4.4 indicated that financial performance was positively associated with
financial sustainability (R = 0.065). The findings further indicated that financial performance explains 0.4% of the
changes in financial sustainability when other factors are held constant (R square = 0.004). An F statistic of 5.752 was
significant at 95% level of confidence which indicates that the model was significant in predicting financial sustainability.
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
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Table 4.3: Model summary of financial performance
Model
R
R Square
Adjusted
R Square
Std. Error
of the Estimate
F
Sig.
1
.065
0.004
-0.162
0.247895
7.025
0.048
a Predictors: (Constant), Financial performance
The Beta coefficient of 3.73 indicated a positive relationship between financial performance and financial sustainability
which implies that an improvement in financial performance leads to an improvement in financial sustainability. The
relationship is however not significant at 5% level of significance. The findings are consistent with Ongaki (2012) who
established that there is a positive relationship between profitability and financial sustainability.
Table 4.4: Regression coefficients of financial performance
Model
Unstandardized
Coefficients
Standardized
Coefficients
t
Sig.
B
Std. Error
Beta
1
(Constant)
1.54
1.143
1.347
0.227
Financial performance
3.73
23.437
0.065
-0.159
0.879
a Dependent Variable: Financial sustainability
Table 4.5: Multiple model coefficients
Model
Unstandardized
Coefficients
Standardized
Coefficients
T
Sig.
B
Std. Error
Beta
1
(Constant)
0.037
1.619
0.023
0.983
Financial
performance
33.305
20.544
0.579
1.621
0.203
a Dependent Variable: Financial sustainability
The overall regression model indicated that financial performance had an insignificant relationship with financial
sustainability since P ( 0.203)>0.05. The optimal regression model was as indicated below:
Financial sustainability = 0.037 + 33.305 x1
5. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusions
The study findings also revealed that financial performance was positively but insignificantly associated with financial
sustainability. This implies that an improvement in financial performance leads to an improvement in financial
sustainability. Furthermore a positive relationship between financial performance and financial sustainability was also
established implying that an improvement in financial performance leads to an improvement in financial sustainability.
The relationship is however not significant at 5% level of significance.
5.2 Recommendations
The study also recommended that even though financial performance is insignificantly associated with financial
sustainability, MFIs should seek to improve their financial performance though growth oriented strategies since increased
profits lead to increased concentration which leads to sustainability. The competitiveness of MFIs should be based on
better financial performance.
5.3 Suggestions of Further Studies
Considering other factors in research would give the extent of each factor’s influence and determination of the
significantly influencing factor. Further research should also be undertaken which would include firms in various sectors
of the economy and compare the different experiences created to these institutions due to the influence of the studied
factors. This would aid in making general recommendations that would be employed by relevant authorities to ensure
efficiency in financial performance of firms
International Journal of Management and Commerce Innovations ISSN 2348-7585 (Online)
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Future studies should also consider employing primary sources of data to collect data for their studies. This would
facilitate detailed information collected from original sources which would as well give reliable and accurate results that
explain the details of the subject.
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Vol. 4, Issue 2, pp: (295-302), Month: October 2016 - March 2017, Available at: www.researchpublish.com
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