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The Effect of Mortgage Financing on Profitability of Microfinance Institutions in Kenya

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The Effect of Mortgage Financing on Profitability of Microfinance Institutions in Kenya THE EFFECT OF MORTGAGE FINANCING ON PROFITABILITY OF MICROFINANCE INSTITUTIONS IN KENYA SAMUEL KARIUKI WACHIRA D63/60078/2013 A RESEARCH PROJECT SUBMITTED IN PARTIAL FULFILMENT OF THE REQUIREMENTS FOR THE AWARD OF THE DEGREE OF MASTER OF SCIENCE IN FINANCE, UNIVERSITY OF NAIROBI OCTOBER 2014 DECLARATION I, the undersigned declare that this is my original work and has not been presented to any other institution or forum for any other award prior to this declaration. Signature:……………………………………Date…………………………………….. Samuel Kariuki Wachira, D63/60078/2013 This research project has been submitted for examination with my approval as the University Supervisor. Signature :……………………………….… Date ………………………….…… Herick Ondigo, Lecturer, Department of Finance & Accounting, School of Business, University of Nairobi. ii ACKNOWLEDGEMENTS I’m deeply grateful to God for guiding me throughout the way. I would like to acknowledge and extend my heartfelt gratitude to my supervisor, Mr Herick Ondigo, for his great support and guidance. I owe many thanks to my family members specifically my wife Emmah Kariuki, parents; the Wachira’s and my siblings. Special thanks to my Pastor Rev Peter Waweru and all of my friends who have been my great source of support and encouragement; I thank them all and wish them all the best in their lives. To all my friends and everyone who contributed to this study in one way or another, I will ever remain grateful. iii DEDICATION This research project is dedicated to my parents Mr. and Mrs. Wachira and to my wife Emmah Kariuki, without whose support and guidance, would not have been possible to get this far. They have always loved me and supported my every choice. iv TABLE OF CONTENTS DECLARATION ............................................................................................................................ ii ACKNOWLEDGEMENTS ............................................................................................................ iii DEDICATION ............................................................................................................................. iv LISTS OF TABLES ..................................................................................................................... viii LISTS OF FIGURES ..................................................................................................................... ix LIST OF ABBREVIATION ............................................................................................................. x ABSTRACT ................................................................................................................................. xi CHAPTER ONE ............................................................................................................................ 1 INTRODUCTION ......................................................................................................................... 1 1.1 Background of the Study ................................................................................................ 1 1.1.1 Mortgage Financing ............................................................................................... 3 1.1.2 Profitability ............................................................................................................. 4 1.1.3 Effect of Mortgage Financing on Profitability ........................................................ 5 1.1.4 Microfinance Institutions in Kenya ........................................................................ 6 1.2 Research Problem .......................................................................................................... 7 1.3 Objective of the Study ................................................................................................... 9 1.4 Value of the Study .......................................................................................................... 9 CHAPTER TWO ......................................................................................................................... 10 LITERATURE REVIEW ............................................................................................................... 10 2.1 Introduction ................................................................................................................. 10 2.2 Theoretical Review ....................................................................................................... 10 2.2.1 Title and Lien Theory ............................................................................................ 10 2.2.2 Welfare Theory of Microfinance .......................................................................... 11 2.2.3 Mortgage Value Theory ....................................................................................... 12 2.3 Determinants of Microfinance Institutions Performance ............................................ 12 2.3.1 Mortgage Financing ............................................................................................. 12 2.3.2 Liquidity ................................................................................................................ 13 2.3.3 Size ....................................................................................................................... 14 2.3.4 Age ....................................................................................................................... 14 2.3.5 Quality of Loan Portfolio ...................................................................................... 14 2.4 Empirical Review .......................................................................................................... 15 2.4.1 International Evidence ......................................................................................... 15 2.4.1 Local Evidence ...................................................................................................... 16 2.5 Summary of Literature Review .................................................................................... 19 v CHAPTER THREE ....................................................................................................................... 20 RESEARCH METHODOLOGY .................................................................................................... 20 3.1 Introduction ................................................................................................................. 20 3.2 Research Design ........................................................................................................... 20 3.3 Population .................................................................................................................... 20 3.4 Data Collection ............................................................................................................. 21 3.5 Data Analysis ................................................................................................................ 21 3.5.1 Analytical Model .................................................................................................. 21 3.6.2 Test of Significance .............................................................................................. 22 CHAPTER FOUR ........................................................................................................................ 23 DATA ANALYSIS, RESULTS AND DISCUSSION ......................................................................... 23 4.0 Introduction ................................................................................................................. 23 4.2 Descriptive Statistics .................................................................................................... 23 4.2.1 Microfinance Loan Portfolio ................................................................................ 23 4.2.2 Microfinance Lending Behaviour ......................................................................... 24 4.2.3 Differences between Microfinance and Commercial banks Mortgage Financing 25 4.2.4 Microfinance Institutions Profitability ................................................................. 25 4.2.5 Microfinance Institutions Liquidity ...................................................................... 27 4.2.6 Microfinance Institutions Loan Portfolio to Total Assets .................................... 27 4.2.7 Microfinance Institutions Offering Mortgage Financing...................................... 28 4.3 Regression Analysis ............................................................................................................ 29 4.3.1 The effect of MFI Liquidity on Profitability .......................................................... 29 4.3.2 The effect of MFI Loan Portfolio on Profitability ................................................. 30 4.3.3 The Effect of Mortgage Financing on MFI Profitability ........................................ 31 4.3.4 Analytical Model .................................................................................................. 33 4.4 Interpretation of the Findings ............................................................................................ 35 CHAPTER FIVE .......................................................................................................................... 37 SUMMARY, CONCLUSION AND RECOMMENDATIONS .......................................................... 37 5.1 Introduction ................................................................................................................
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