The Effect of Outreach on Financial Performance of Microfinance Institutions in Kenya

Abstract

Across African regions, MFIs in East Africa are the most profitable while those in West Africa generate positive returns. The question, however, remains as to whether this profitability is because of increased outreach or not. Such knowledge is vital in developing strategies that would enhance the expansion of outreach and hence alleviation of poverty.The study aimed to investigate the effect of outreach on financial performance of MFIs in Kenya. This study used a descriptive survey method to achieve this objective. The population of interest consisted of all the 52 MFIs (Appendix II) registered by AMFI (Association of Microfinance Institutions-http://www.amfikenya.com) and operating in Kenya. Failure to obtain primary data from most MFIs led to use of secondary data from http://www.mixmarket.org. Data analysis was done using descriptive statistics and regression analysis. Most of the MFIs studied were established in 2001-2010. Majority of the MFIs were Non-Banking Financial institution (NBFI) while others were Non-Governmental Organizations (NGOs) and banks. Loans, savings, and insurance are the main products and services offered by MFIs. The regression analysis has shown that 84.7% of the dependent variable, net income before tax and donations, can be explained by the independent variables, (number of borrowers, cost per loan, average loan balance per borrower and number of products and services offered). However, only number of borrowers was found to be a significant predictor of net income before tax and donations. Based on the study findings, MFIs keen on enhancing their financial performance should therefore focus on increasing the number of active borrowers. Number of active borrowers is the breadth of outreach for MFIs and therefore outreach is seen to affect financial performance of MFIs significantly. Although the other elements of outreach such as cost per loan, average loan size, and number of products and services offered affect financial performance of MFIs, they are not significant.