An assessment of performance of micro-finance institutions (MFIs) in Kenya

Abstract

The study has two major objectives firstly, to determine the various performance measures used by MFIs in Kenya. Secondly, to evaluate performance of MFIs for a five year period running from 2000 to 2004. Given the importance of Microfinance to social-economic development of a nation and the correlation between MFI performance and socio-economic growth, MFI performance is thus an issue that needs consistent monitoring to ensure positive outcomes. Credit is the engine of economic growth in capitalism, because it supplies the much needed investment capital to private entrepreneurs. Thus, if the macro-financial system operates properly, a capitalistic economy grows rapidly, making both individuals and the nation better off. The study entailed a descriptive survey design. The population of study comprised all MFls in Kenya, amounting to over 3,000 legally constituted entities. The sample selected was those MFIs that fall under the umbrella of the Association of Microfinance Institutions of Kenya (AMFI) between the year 2000 aI?d 2004. A sample of 22 institutions, obtained from AMFI was used. Data collection was done using a questionnaire for primary data and a secondary data collection form for secondary data. Primary data was used to determine those performance measures used by MFIs and the extent to which these are used, while secondary data was used for determining the actual performance of the MFIs for the period under consideration. Data analysis was conducted using descriptive statistics and trend analysis. The finding of study shows that most of the performance measures presented were significantly used by the MFIs. The MFIs personnel rated their performance on these measures as ranging from average to good on the five point Likert scales. <The most widely used financial and non-financial measures included: Return on Investment, Return on Capital Employed and Net Profit Margin (Profitability measures), Debt ratio, Debt-Equity ratio and the Times Interest is Earned (Leverage ratios), Current and Quick ratios (Liquidity ratios), and Credit decision cycle time, Transaction accuracy and timeliness, Zero defects, Loan processing cycle, Product quality and Continuous improvement (Non-financial measures). On the other hand the following measures were least or never used by MFIs: Dividend per Share, Earnings per Share, Market Book Value per Share, Earnings Yield and Price to Earning ratio. Trend analysis on the performance of the MFIs revealed some favourable minimal improvement performance over the period 2000 to 2004. In view of the above there is need for government to put measures in place to instil prudence in the management of this sector. These measures will ensure information disclosures that will improve transparency and efficiency in the sector as a whole.