IIARD International Institute of Academic Research and Development

INTERNATIONAL JOURNAL OF ECONOMICS AND FINANCIAL MANAGEMENT (IJEFM )

E-ISSN 2545-5966
P-ISSN 2695-1932
VOL. 4 NO. 3 2019

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Arbitrage Pricing Theory Modelling of Microfinance Institutions Financial Performance in Kenya

Wycliffe Mugun, PhD Candidate

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Abstract

Microfinance is the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to the poor and low-income households and their micro enterprises. The sector reaches out to 832,794 active borrowers with a loan book amounting to Kshs.28.6 billion and reporting 26.4 % annual growth in Kenya. However, owing to the fact that there is limited literature on the determinants of financial performance, various studies conducted indicate divergent views on the effect of financial indicators on financial performance. For this reasons it is not clear whether or not financial indicators affect financial performance of microfinance institutions (MFIs) in Kenya. The study was modeled on the Arbitrage pricing Theory and correlation research design adopted. Target population comprised 12 registered MFIs. Sample size consisted a panel data set of 12 MFIs selected using purposing sampling method for the period from 2009 to 2013 and secondary data was collected. Fixed effect model was the preferred model based on the Hausman specification but the study used random effect model since fixed effect model gave insignificant results. Breusch pagan LM test of heteroscedasticity in random effects was conducted to test if the variance of the residual term will be constant over different values of the explanatory variables. Random effect model results revealed that debt to equity ratio had a negative but insignificant relationship with return on assets ratio. Portfolio to assets ratio had a positive relationship with financial performance but the relationship was not significant. Operating expense ratio had negative and significant relationship with return to assets ratio. The coefficient for lagged return to assets ratio was 0.4733, debt to equity ratio was -0.0026, portfolio to assets ratio was 0.0090 and coefficient for operating expense ratio was -0.1857. P- values for DER was 0.878 , PAR, 0.686 and OER, 0.000.The results for lag

keywords:

Microfinance, Financial ratios, Financial performance, Kenya

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