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.
CHAPTER ONE: INTRODUCTION
Background to the Study
The performance of any firm increases the market value of that specific firm but also leads towards the growth of the whole industry which ultimately leads to the overall prosperity of the economy. Most domestic oil processing in Kenya is undertaken by 15 edible oil manufacturing companies (KAM, 2014) accounting for 95% of the manufacturing base of the edible oil industry. Edible oil manufacturing companies are utilizing about 53% of capacity (KAM, 2014). Capacity utilization in the sector is therefore constrained both by the quantity and quality of oil seeds. Capacity utilization of the edible oil sub-sector is by far the lowest among the food manufacturing sector industries and also lower than the average of the Kenya manufacturing industries over the past few years. The edible oil sub-sector has thus diverse and significant constraints (James, 2013). Value chains is very effective way of focusing on measures to improve the intencity and impact of financing. This will include the financing made by smallholder farmers themselves and those made by large-scale domestic or foreign investors. The value chain describes the full range of activities required to bring a product or service from conception, through the different phases of production, delivery to final consumers and final disposal after use (Kaplinsky & Morris, 2001). The prime objective of the value chain is to ensure the equal distribution of value generated among the members of the value chain (Nedelcovych & Shiferaw, 2012). The ‘Value Chain’ was used in a book “Competitive Advantage: Creating and Sustaining and improving Performance” (Porter, 1985). The value chain analysis explains the activities performed by the organization.
