Budgetary Controls and Financial Performance of Micro Finance Institutions (MFIs) in Kenya

Abstract

Micro financing institutions in Kenya showed a high growth rate since they were established in 1997 and legislation passed in 2006 with the micro finance Act which became active in 2008. The research sought to determine exactly how budget controls influence financial performance of micro finance organizations (MFIs) in Kenya. The objectives of the study were to establish the effect of budget planning on the performance of MFIs; to figure out the impact of budget control on the performance of MFIs in Kenya; to establish the impact of budget plan analysis on the economic efficiency of MFIs and to assess the impact of budget coverage on the financial performance of MFIs in Kenya. The research study was anchored on the Priority Based Budgeting Theory, Goal-setting theory as well as the Accountancy theory. The study adopted the descriptive research design. The target population was 713 employees of the 14 MFIs in Kenya. Purposive sampling was adopted to select a sample size of 70 top and mid-level managers. Data was obtained via structured questionnaires as well as an interview schedule. Descriptive and inferential statistics were used to analyze the data with the help of SPSS. The study used a multiple regression model to show the relationship between the study variables. The findings revealed an R squared of 0.872 which means that the independent variables contribute up to 87.2% of the changes in the dependent variable and adjusted R squared of 0.864 at 95% significance level, implying that the budgetary controls adopted in this study (Reporting, Planning, Evaluation, Coordination) jointly explained 87.2 percent of the variation in performance of the MFIs in Kenya. The study also found that budget planning as an aspect of budgetary control had a positive and significant effect on the performance of MFIs in Kenya (β =105, p=.016<.05), budget coordination as an aspect of budgetary control had a positive and significant effect on the performance of MFIs in Kenya (β =.162, p=.005<.05), budget evaluation as an aspect of budgetary control had a positive and significant effect on the performance of MFIs in Kenya (β =.240, p=.005<.05), and finally that budget reporting had a positive and significant effect on the performance of MFIs in Kenya (β =.398, p=.000<.05). The study concluded that budgetary control practices adopted had positive and significant effect on the performance of MFIs in Kenya. The study thus recommended that recommends that the microfinance institutions should consider enhancing the budgetary control measures such as budget planning, budget coordination, budget evaluation and budget reporting as ways of enhancing their performance. Keywords: Budgetary Controls, Financial Performance, Microfinance Institutions