Effects of asset diversification on the financial Performance of micro finance institutions in Kenya

Abstract

The microfinance sector has been facing challenges since their inception 20 years ago and as recent as 5 years ago, MFIs have still been focusing on overcoming the challenges of delivering one product - microcredit to one market -micro entrepreneurs. The financial gains by institutions that have applied a broader vision of sustainable financial services for the poor is now motivating MFIs around the world to query whether they too can and should do more. The objective of the study was to establish the effects of asset diversification on the financial performance of micro finance institutions in Kenya. To carry out the study, the researcher adopted a causal research design. The target population in this research was 41 of the 56 micro finance institutions registered and operating in Kenya. Data used was secondary collected from annual reports from 2009 to 2012 of the relevant Micro Finance Institutions. Data analysis was done using SPSS and data findings presented using figures and tables. Multiple correlation analysis was used to determine the relationship between variables of the study. The study findings established that asset diversification has a positive effect on the financial performance of micro finance institutions in Kenya. Return on asset ratio had a significant cor relation to return on fixed and intangible assets, return on financial assets, and return other investments, returns on cash and cash equivalent and returns on loans and that the relationship was direct. The study recommends that policymakers should formulate financial policies that create standardization of the operations of MFIs such as minimum portfolio. Reporting requirements for MFI's should also be standardized so as to improve industry comparison with other financial institutions This study further recommends that policymakers should formulate appropriate policies that would increase investment in MFI's thereby giving access to financial aid to the low income population as well as spur growth and stability in the micro finance institutions.