The relationship between profitability growth and the yield on gross portfolio of Micro-finance Institutions In Kenya

Abstract

The objective of this study was to find out the relationship between profitability growth and the yield on gross portfolio of micro-finance institutions in Kenya. The performance of microfinance institutions has been studied extensively both locally and internationally. In the global arena for instance, Dissanayake (2012) tried to investigate the determinants of profitability proxied by ROE for eleven MFIs in Sri-Lanka for the period covering 2005-2011. It is evident that there exists no study in Kenya that has ever studied the relationship between yield on gross loan portfolio and profitability. Therefore is it against this backdrop that this study sought to find out the relationship between profitability growth and the yield on gross portfolio of micro-finance institutions in Kenya by answering the question: What is the relationship between profitability growth and the yield on gross portfolio of micro-finance institutions in Kenya? This research involved a cross sectional survey of the credit only micro finance institutions operating in Kenya. The population of the study in this research was the microfinance institutions headquartered in Nairobi. The sample size of this study was 5 credit only microfinance institutions. From the 5 credit only microfinance institutions, the study targeted the chief financial managers from each to make a sample size of 5 respondents. The study used primary data that was collected through a selfadministered questionnaire that consisted both open and closed ended questions designed to elicit specific responses for qualitative and quantitative analysis respectively. The study findings revealed that increased competition has led to increased efficiency and that the increased efficiency in turn has allowed MFIs to generate increasing profits from lower yields. Furthermore the study found out that NGO MFIs generally achieve a higher Return on Assets than licensed and supervised MFIs and that in the absence of competition, even highly inefficient MFIs can remain profitable by simply raising their interest rates. The Pearson correlation analysis to determine the relationship among the independent and variables showed that the variables are perfectly and positively correlated and vice versa. This shows that the Profitability growth and growth in portfolio yield variables are dependent on each other for the Yield on Gross Portfolio.