VENTURE CAPITAL FINANCING AND FINANCIAL PERFORMANCE OF MICROFINANCE BANKS IN KENYA

Abstract

Microfinance banks play a crucial role in providing financial services to underserved populations, and their financial viability is essential for the stability of the sector. However, poor financial performance in these institutions, often exacerbated by the risky nature of their business, can lead to solvency issues and instability. Despite these challenges, venture capital financing has supported microfinance banks, although the share of venture capital investment in developing countries, particularly in Africa, has declined over the past decade, with a primary focus on the technology sector. In Kenya, despite venture capital investments in microfinance banks, their financial performance has continued to decline. The general objective of this study was to investigate the effect of venture capital financing on the financial performance of microfinance banks in Kenya. The study was grounded in the trade-off theory, pecking order theory, market timing theory, and static theory. A review of past studies highlighted a conceptual framework gap, as the applicability of these theories to venture capital financing and financial performance remains inconclusive. Additionally, prior research was largely focused on different jurisdictions, leading to a geographical gap in the literature. The study employed secondary data derived from online published studies and reports, including financial statements from microfinance banks and regulatory documents from the Central Bank of Kenya. The data were analyzed to explore the relationship between venture capital financing and financial performance. The findings revealed that the current body of literature does not conclusively address the applicability of the mentioned theories to venture capital financing in the microfinance sector, particularly in the Kenyan context. The study's results are expected to benefit regulators such as the Central Bank of Kenya and venture capital investors. The findings will enable investors to better understand how their financing impacts the performance of microfinance banks and contribute to the existing body of knowledge in the field of venture capital financing. Based on the findings, recommendations will be made to regulators and venture capitalists on how to enhance the financial performance of microfinance banks. These recommendations aim to address key challenges in capital financing and help improve the sustainability of microfinance institutions in Kenya. In summary, this study filled a gap in the literature by exploring the role of venture capital in the financial performance of microfinance banks in Kenya, offering both theoretical and practical insights for policymakers and investors.