An investigation into factors influencing financial sustainability of micro finance institutions in Kenya

Abstract

The unique potential of micro finance sector to reduce poverty and sustain itself can easily be lost if MFI's are not committed to continue extending services to the low-income households on a long term basis. Worse still, temporary micro-finance programs can disrupt the financial systems in an economy and the lives of their beneficiaries with disastrous effects. Chua (1998), observed that a significance number of the Micro finance service providers are struggling with sustaining their institutions despite emergence of models that have shown increasing success in terms of their ability to reach the poor and in sustaining the delivery of financial services. In Kenya, Micro Finance Institutions are highly subsidized and rely mainly on donor funding and most have died or collapsed due to lack of funding caused by donors withdrawal. This study sought to bridge the research gap by investigating factors influencing financial sustainability of Micro Finance Institution's (MFI's) in Kenya. The study was a descriptive survey targeting a population of 33 MFI's operating in Nairobi governed by the Micro finance Act of 2006. Both primary and secondary data were used collected by use of the questionnaires with both open ended and closed ended questions and annual reports and other publication materials respectively. The study was analysed using SPSS statistical software and the data presented in table, graphs and the explanations in prose-form. The study found out that MFIs sustainability have been influenced by differentiated services, slacken the requisite for collaterals and beef up of the legal procedures and use financial indicators/ratios like leverage ratios, analysis of arrears rate, analyzing the delinquency of borrowers to mention just a few, to assess, monitor and evaluate market share, credit defaults, non-performing loans and customer loyalty. The study however recommended that MFIs should solicit for more funds from donors, increase the range of services they provide and beef-up their governance structure.