Financial Ratios (Accounting Ratios) and Survival of Microfinance Institutions in Ghana

Abstract

Accounting Ratio is a way of expressing the relationship between one accounting result and another, which is intended to provide a useful comparison. Accounting ratios assist in measuring the efficiency and profitability of a company based on its financial reports. Accounting ratios are important for financial decision making irrespective of the size of the institution. The Bank of Ghana has the constitutional mandate to oversee the activities of all financial institutions in Ghana including the Microfinance institutions. This core mandate of Bank of Ghana is basically guided by the use of accounting ratios. The ratios per their style have the power to determine the risk exposure of financial institutions. Over the past five years the Ghanaian economy has witnessed the collapse of certain microfinance institutions that the public assumed to be highly visible in the financial market. The study therefore provided a logistic regression model with 117 observations to determine whether accounting ratios have the power to predict the fortunes of microfinance institutions in Ghana. An increase in the current ratio reduces the log-odds of a firm's survival by -1.461987. An increase in the acid test ratio improves the log-odds of survival by 6.847345. An increase in the debt equity ratio increases the chances of survival of a firm by 1.055941. Current ratio and acid test ratio were statistically significant at 10 percent whilst debt equity ratio was statistically significant at 5 percent. The study implies that microfinance institutions should be mindful of the current ratio, acid test ratio and the debt to equity ratio.