Abstract
<p>The study was conducted to determine the effect of microcredit on financial performance of small scale cooking oil processors in central Malawi. Adopting a mixed research approach, the DuPont identity was used to compare the financial strengths and weaknesses between businesses that acquired a microcredit and those that did not. First, the study found that small scale cooking oil processing is a profitable business, regardless of their status in microcredit acquisition. However, microcredit had mixed effects on the financial performance of businesses. Microcredit improved the level of business capital for the businesses translating into better production efficiency, competitiveness and acquisition of a market share thus positively contributing to financial performance. On the other hand, microcredit increased the debt equity ratio hence increasing the businesses’ risk of default. The study recommends the businesses to further improve production efficiency and net asset turnovers. In addition, small and medium scale businesses ought to prudently contract microcredit in order to enhance their financial performance whilst checking for their risk of financial distress.</p>
Highlights
In recent years, the Malawi economy has experienced a proliferation of Microfinance Institutions (MFIs) offering a wide range of microfinance products including but not limited to provision of microcredit
Microcredit improved the level of business capital for the businesses translating into better production efficiency, competitiveness and acquisition of a market share positively contributing to financial performance
The findings suggest that all the sampled businesses exhibited good financial performance, evidenced by the recorded positive Return on Equity (ROE)
Summary
The Malawi economy has experienced a proliferation of Microfinance Institutions (MFIs) offering a wide range of microfinance products including but not limited to provision of microcredit To this effect, microfinance and development related literature for the country has recorded livelihood uplifting effects associated with these microcredit schemes. High levels of unemployment in the formal employment sector and overdependence on rain-fed agriculture remain other conspicuous challenges stifling the economy (MoEPD, 2012) These factors, combined, have driven a large proportion of the economically active population into informal employment. Besides supporting the economy through creating employment opportunities, the sector plays a key role in improving people’s livelihoods (Sub-Saharan Consulting Group, 2012) Given their widespread presence and contribution to the economy, MSMEs are regarded as one of the drivers of sustainable economic development in Malawi. Availability and accessibility of microcredit is key to business growth and improved financial performance (Churchill & Mullins, 2001)
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