An investigation on the use of financial performance indicators by microfinance institutions (MFIs) (A case of Nairobi)
Mahinda, Purity Wamuyu
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The Microfinance Institutions (MFIs) operating III Kenya have a huge role to play towards poverty alleviation through credit accessibility to Small and Micro Enterprises (SMEs.) However their success in their mission of financing the majority poor will depend largely on their financial performance. In order to be able to evaluate an organizations performance there is need for the organization to have specific performance indicators. By calculating performance indicators it becomes possible to determine institutional effectiveness and efficiency. Performance indicators collect and restate financial data so as to provide useful information about the financial performance of an MFI. The objective of this study therefore, was to evaluate the use of financial performance indicators by microfinance institutions in Nairobi. The study also looked at the relationship between the sources of finance and the financial performance indicators used by these MFIs. Various categories of MFIs were covered, namely Non Governmental Organizations (NGOs), Development Finance Institutions (DFIs) and Commercial Banks. Data was collected using questionnaires and analyzed using Descriptive statistics and Statistical Package for Social Sciences (SPSS). The study realized that all the MFIs interviewed used at least two financial performance indicators to assess their financial performance. However, some performance indicators were highly used compared to others especially the portfolio Quality Ratios which included, Portfolio at Risk (PAR), Delinquent Borrowers, Arrears rates and Average per credit officer. The study found that the Chi-square test(X2) results showed that there was a relationship between financial performance indicators and sources of finance that is, sources of finance determine the financial performance indicator MFI uses. On the basis of these findings, a number of recommendations are advanced. First the research recommends all the Microfinance Institutions to use almost the same financial performance indicators because they have a lot in common in terms of their sources of finance and their business environment. Secondly, there is a need to have a set of standard performance indicators for use by MFls. Third, the Government on the other hand needs to streamline the operations of MFls by having clear cut policies on the Microfinance sector as well as be on the frontline in helping them with funds to run the organizations. A regulatory body should be put in place to oversee the smooth running of MFls. Lastly it recommended that similar studies be carried out on a larger scale, involving more respondents. It also recommended that a study be carried out to evaluate the extent to which Microfinance Institutions use financial performance indicators. These should include ratio analysis for the particular indicators.