Value chain financing and financial performance of edible oil manufacturing companies in Kenya

Abstract

Edible oil manufacturing companies in Kenya were making profits but not optimal profits. There was no shortage of market demand for the commodity in Kenya and East Africa in general. However, the industry is affected by low production of raw materials in the country and inadequate financing by members in the value chain besides lack of clear initiative and knowledge in developing the value chain. It was therefore necessary to estimate the internal and external financing and investment needs in the development of value chain for the sector. The general objective of this research was to determine the effects of financing by members in the value chain on the financial performance of the edible oil manufacturing companies in Kenya, while the specific objectives were to establish the effects of financing in raw material and operation, financing in working capital arrangement, primary activities and supporting activities together with establishing the effects of moderating variable, firm characteristics such as firm size and capital structure, on the financial performance of these companies. The study used descriptive retrospective panel data and philosophy was positivism where all manufacturing companies in the edible oil sector in Kenya were included making it a census study. The secondary data was extracted from financial statements of edible oil manufacturing companies for the period 2008 to 2014 and primary data by using the interview guide administered to the company executives. Using Principal Component Analysis, composite index of dependent variable (financial performance) was computed representing 3 components for further analysis in the study. Descriptive analysis, correlation and panel regression analysis were used to investigate the relationship and association of variables in value chain financing. The results of this study have provided an improved understanding of the value chain financing and how improved and appropriate financing affects the financial performance of edible oil sector in Kenya. The major findings and conclusions of this study show that, financing in primary activities through inbound logistic, had negative statistical effect on financial performance of companies (Beta value -4.56, P-Value 0.04). Support activities through procurement cost had positive statistical effect on financial performance of companies (P-Value 0.00001, Beta value 6.09). The moderating variable firm characteristics measured through Firm Size had positive statistical effect on financial performance of companies (P-Value 0.0001, Beta value 2.14). Financing through raw material and working capital did not have statistical effect on the financial performance. The study provided statistical model for determining the appropriate finance mix in primary activities, supporting activities and working capital to utilize the optimum capacity for edible oil manufacturing companies in Kenya. Study also suggested that additional financing in value chain affects the financial performance and therefore should be from long term sources of finance. Result of the study will help in understanding and developing the value chain. The study will also help policy makers for preparing guidelines for financial institutions for financing of value chain. The study results form the basis for future research in the area of value chain financing in other manufacturing sectors and can be used by the management of the companies to develop strategies for financing mix in their companies based on the model developed by the study for predicting the financial performance.