Influence of financial lever age on financial sustainability: A case of a microfinance institution in Kenya

Abstract

Microfinance institutions (MFI) play a crucial role in economic development and financial inclusion. Financial sustainability is the key to the growth of microfinance institutions which indicates its importance. Therefore, the current study investigated the effect of financial leverage on MFI’s financial sustainability. The specific objective was to establish the effect of financial leverage on the financial sustainability of MFIs. The study was guided by the agency theory and life-cycle theory. It adopted an explanatory research design where a panel approach was used as well as the positivist paradigm. The study adopted the census approach method. Panel data was drawn from 30 MFIs for the period 2010-2018 from the MIX market database using the data collection schedule. The study used both descriptive and inferential statistics to analyze the data with the help of STATA software. A fixed effect model based on the Hausman test (X 2 = 45.41, p= 0.000 ≤ 0.05) was used. The findings indicated that financial leverage (β1 = 0.27, p − value = 0.001) has a positive and significant effect on the financial sustainability of MFIs. The authors recommend MFIs’ managers to engage in the prudent use of financial leverage so that they may enhance their overall profitability and boost investor confidence through their strategic decision-making resulting in financial sustainability. The results/findings have implications for business managers and policymakers given the vital role in service delivery and the challenges hindering the sector from the realization of financial sustainability in the economy.