Debtors Management and financial Performance Of Microfinance Institutions In Nyeri County,Kenya

Abstract

The financial health of the Microfinance banking industry is an important element for economic stability and growth .Microfinance banks are part of the financial sector in an economy performing valuable activities on both sides of the balance sheet and provides financial support to other segments. In the recent past performance among MFIS has continued to attract attention not only globally but regionally, this shift has caused a very big gap in terms of their profit margins. It is evident that their performance has been on a declining trend despite the efforts made to counter their lost profits this is due the fact that they are over indebted. While MFIS in other continents have been reporting positive profits over the years, those operating in Africa continue to post negative profits and thus the study sought to explain this gap by assessing the debtors management practices that have been adopted by the MFIS in Nyeri,County, Kenya. This was mainly to reduce the amount of money that is left outstanding which accumulates to form doubtful debts in any financial year. Management should thus be in a position to adopt debtors management techniques and use them appropriately to find solutions and encourage financial performance. The general objective of the study was to assess the effect of debtors management on financial performance of MFIS in Nyeri County, Kenya. Whereas the specific objectives of the study were: To determine the effect of credit extension policy, debt control and monitoring and debt collection policy on financial performance of Micro Finance Institutions in Nyeri county, Kenya. Various theories were incorporated in this study. Transaction cost theory establishes the need for qualified staff in the MFIS sector in order to minimize cost, Loanable funds theory provides knowledge on pricing of loanable funds, while the liquidity preference theory reveals the equilibrium point where demand meets the supply of money. The target population was eight (8) Microfinance Institutions in Nyeri County which targeted the operations manager, finance manager and the debt collection officers. The researcher used purposive sampling to pick respondents and a sample size of 48 respondents was picked. The validity and reliability of the research instrument was tested and a Cronbach alpha coefficient threshold of 0.8was used. The researcher used a semi structured questionnaire to collect data. Data was analyzed using descriptive analysis (mean, standard deviation and percentages) and Multiple Regression Analysis. The results showed that the independent variables in consideration had a relatively strong positive correlation where credit extension policy had a Beta value of -0.351 and a p-value of 0.000, debt control and monitoring had a Beta value of 0.208 and a p-value of 0.010, while debt collection policy had a Beta value of 0.266 and a p-value of 0.023. Recommendations of this study were that management of MFIS should be keen while coming up with credit extension policies since this affects financial performance if not adhered to,MFIS should adopt and implement stringent debt collection policies as this significantly increases financial performance. MFIS should also strictly monitor outstanding debt on a continuous basis as this improves financial performance.