Abstract
This paper uses an accounting ratio technique to evaluate the financial performance of microfinance institutions in Sierra Leone before the Ebola outbreak, with particular emphases on profitability, sustainability, asset and liquidity management, portfolio quality, efficiency and productivity using the parameters of other deposit-taking institutions. The survey considered Community Banks (CBs) and Financial Service Associations (FSAs) and their clients in the four (4) districts of Kenema, Kailahun, Kono and Koinadugu. A sample of 3 FSAs per district and a total of 5 CBs were in the 17 institutions for the survey. Profitability basis, the performance of the sampled FSAs showed a steady improvement in ROCE, ROA and NOPM for the period 2011 to 2012 but slumped drastically in 2013. Among other reasons, the catalyst for high performance in 2011 period was that the institutions’ loan portfolio grew exponentially alongside favourable interest rates coupled with low operating costs and extremely low provisions for bad loans. Operational Self-Sufficiency (OSS) in the periods 2011 and 2012, of 166%, and 114% respectively appeared stable and encouraging but as profit dwindled, the OSS fell sharply in 2013 to 45%; implying that the sampled FSAs could only cover 45% of operating expenses from revenue generated from operations. If the situation persists, the need to subsidize operations of the FSAs may be inevitable in the near future. Portfolio at Risk (PAR) kept an upward trend over the years. The ratio grew from 0.03 in 2010 to 0.06 in 2011 and doubled again to 0.12 in 2012, implying that the collection effort of the sampled FSAs had not been robust enough to keep pace with the growing size of loan disbursement. If the trend continues, sustainability could be threatened as the need for further huge write-off in subsequent years might be inevitable.
Highlights
Microfinance has become a diverse and growing industry
Profitability basis, the performance of the sampled Financial Service Associations (FSAs) showed a steady improvement in Return on Capital Employed (ROCE), Return on Asset (ROA) and Net Operating Profit Margin (NOPM) for the period 2011 to 2012 but slumped drastically in 2013
The catalyst for high performance in 2011 period was that the institutions’ loan portfolio grew exponentially alongside favourable interest rates coupled with low operating costs and extremely low provisions for bad loans
Summary
Microfinance has become a diverse and growing industry. Thousands of Microfinance Institutions (MFI) exit, ranging from grassroots self-help groups, village banks, community banks to commercial banks, all providing financial services to millions of low-income households around the world. In Sierra Leone, most MFIs receive support and services from donor agencies and from investors, lenders, network organizations rating firms, management consulting firms and host of other financial specialized businesses. These organizations together make up a global microfinance industry. The CBs and FSAs should have been in existence for more than nine years and have more than 4000 beneficiaries with more than two loan circles Both primary and secondary data were collected from the selected sample.
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