A Case of YETU Microfinance Bank Limited

ANALYSIS OF FACTORS AFFECTING FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTION IN TANZANIA: A Case of YETU Microfinance Bank Limited

BY ISSANGU, MBEYU SIA

A Dissertation Submitted in Partial Fulfillment of the Requirements for the Award of the Master’s degree in Business Administration- Corporate Management in Mzumbe University

December1, 2020

CERTIFICATION

We, the undersigned, certify that we have read and hereby recommend for acceptance by the Mzumbe University, a dissertation entitled “Analysis of Factors affecting Financial Performance of Microfinance Institution in Tanzania” in the partial fulfillment of the requirements for the award of the degree of Master of Business Administration Corporate Management of Mzumbe University.

______Major Supervisor

______Internal Examiner

______External Examiner

Accepted for Mzumbe University, Dar es Salaam Campus College

______CHAIRPERSON, DAR ES SALAAM CAMPUS COLLEGE BOARD

DECLARATION AND COPYRIGHT

I Issangu, Mbeyu Sia proclaim that this dissertation is my own original work and that it has not been presented and will not be presented to any other university for a similar or any other degree award.

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Date:

©2020 This dissertation is a copyright material protected under the Berne Convention, the Copyright Act 1999 and other international and national enactments, in that behalf, on intellectual property. It may not be reproduced by any means in full or in part, except for short extracts in fair dealings, for research or private study, critical scholarly review or discourse with an acknowledgement, without the written permission of Mzumbe University, on behalf of the author.

ACKNOWLEDGEMENTS

Firstly, I give my heartfelt gratitude to Almighty God: This research has been completed by his grace. Moreover, I pay a great thanks to my supervisor, Dr. Paul Mushumbuzi Kato, because this research would not have been complete without his guidance, understanding and patience.

Furthermore, I’m eternally grateful to my husband Nacha for holding down the fort when I was busy with school and my entire family, for their endless support; morally and financially. Finally, I am in debt without acknowledging my MBA lecturers and my classmates who have made me complete this course successfully. The learning experience has been memorable and enjoyable at Mzumbe University Dar es Salaam College Campus.

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DEDICATION

I dedicate this dissertation to my guardian angels here on earth, my parents Masoud & Dolores Issangu. Thank you for all your love and support.

ABBREVIATIONS AND ACRONYMS

ICT Information and Communication Technology MFI Microfinance Institutions UN United Nations URT United Republic of Tanzania SPSS Statistical Package for the Social Science WB World Bank SACCOS Savings and Credit Cooperative Society LAC Latin American Countries OSS Operational Self-Sufficiency Ratio SA South Asia ROA Return on Assets ROE Return on Equity ALBB Average Loan Balance per Borrower FSS Financial Self-Sufficiency EMI Equated Monthly Installments

ABSTRACT

The study focused on assessing factors affecting the financial performance of microfinance institutions. Specifically, the study examined the impact of quality of loan portfolio on financial performance, the impact of institutional capacity on financial performance, and the impact of saving mobilization and outreach of MFI on financial performance in Tanzania.

The study adopted a descriptive research design considering YETU Microfinance as the case of the study. A total of 50 respondents participated in the study. The researcher adopted purposive sampling because the selected respondents possess the required knowledge and information in answering research questions of the study. Managers and bank officials took part in answering the questionnaire. Data collected were analyzed qualitatively and quantitatively through using SPSS were the results were presented in table form.

The study finds on the quality of loan portfolios the microfinance has, through factors such as the size of the loans, Loan delivery mode, nature of the loan extended to customers, rates of loan defaults and cost per borrower affects the financial performance of microfinance. The analysis also reveals that the geographical coverage, staff’s qualifications, Technology adoption, breath and outreach of microfinance and size of the microfinance fell under impact of institutional capacity that also impacts the financial performance of the microfinance. Furthermore, the findings reveal that saving mobilization and outreach factors that affect the financial performance of microfinance such as level of savings, number of borrower’s long-term debt financing, and the amount of non-repaid loans.

The study concludes that for microfinance institution to maintain an uprising financial performance it should recognize the importance of the mentioned factors and supervise their variations repeatedly. The study recommends that organizations need to consider these three very useful and if possible to be reviewed together whenever loans are given out to the applicants to reduce the risk of poor loan performances.

TABLE OF CONTENTS

CERTIFICATION ...... i DECLARATION AND COPYRIGHT ...... ii ACKNOWLEDGEMENTS ...... iii DEDICATION ...... iv ABBREVIATIONS AND ACRONYMS ...... v ABSTRACT ...... vi LIST OF TABLES ...... xi LIST OF FIGURES ...... xii

CHAPTER ONE ...... 1 INTRODUCTION ...... 1 1.0 Introduction ...... 1 1.1 Background of the study ...... 1 1.2 Statement of the Problem ...... 5 1.3 Main objective of the study ...... 6 1.3.1 General objective ...... 6 1.3.2 Specific objectives ...... 6 1.4 Research Questions ...... 7 1.5 Significance of the study ...... 7 1.6 Rationale of the study...... 8 1.7 Scope of the study ...... 8 1.8 Organization of the Dissertation ...... 9

CHAPTER TWO ...... 10 LITERATURE REVIEW ...... 10 2.0 Introduction ...... 10 2.1 Definition of Key terms ...... 10 2.1.1 Microfinance Institutions ...... 10 2.1.2 Financial Performance ...... 11 vii

2.2 Theoretical Perspectives: ...... 12 2.2.1 General Theories ...... 12 2.2.1 Factors affecting performance of MFI’s ...... 12 2.2.1.1 Capital ...... 12 2.2.1.2 Loan Portfolio ...... 13 2.2.1.3 Management Efficiency ...... 13 2.2.1.4 Liquidity ...... 14 2.2.1.5 Loan Size ...... 14 2.3. Specific Theories ...... 15 2.3.1 Micro Credit Theory ...... 15 2.3.2 Traditional theory of capital structure ...... 16 2.4 Review of Empirical Studies ...... 17 2.4.1 Empirical Studies outside Tanzania ...... 17 2.4.2 Empirical Review in Tanzania ...... 20 2.5 Conceptual Framework ...... 20 2.7 Research gap ...... 22

CHAPTER THREE ...... 23 RESEARCH METHODOLOGY ...... 23 3.0 Introduction ...... 23 3.2 Research design ...... 23 3.3 Study area ...... 23 3.4 Study population ...... 24 3.5 Sampling Technique and Sample size...... 24 3.5.1 Sampling Technique...... 24 3.5.1.1 Non-Probability Sampling ...... 24 3.5.1 Sample size...... 25 3.6 Data Collection...... 25 3.6.1 Primary Data ...... 25 3.6.2 Secondary Data ...... 26 3.7 Data Collection Methods ...... 26 viii

3.7.1 Questionnaires ...... 26 3.7.2 In-depth Interviews ...... 27 3.8 Data Reliability and Validity ...... 27 3.8.1 Data reliability ...... 27 3.8.2 Data Validity ...... 28 3.9 Data analysis ...... 29 3.10 Ethical considerations ...... 29

CHAPTER FOUR ...... 30 PRESENTATION OF FINDINGS ...... 30 4.1 Introduction ...... 30 4.2 Socio-Demographic characteristics of the respondents ...... 30 4.3 Findings as the Study Objectives ...... 33 4.3.1.7 Relationship between variable ...... 37 4.4.2 Objective two ...... 39 4.4.3. Objective three ...... 44

CHAPTER FIVE ...... 49 DISCUSSION OF THE FINDINGS ...... 49 5.1 Introduction ...... 49 5.2 Discussion of the study as per research objectives and findings ...... 49 5.2.1 The impact of quality of loan portfolio on financial performance of MFI ...... 49 5.2.2 The impact of institutional capacity of MFI on financial performance...... 50 5.2.3 The impact of saving mobilization and outreach of MFI on financial ...... 52

CHAPTER SIX ...... 54 SUMMARY CONCLUSIONS AND POLICY IMPLICATIONS ...... 54 6.1 Summary ...... 54 6.2 Conclusion ...... 55 6.3 Policy Implications ...... 56

6.4 Limitations of the study ...... 58 6.4 Area for further research ...... 58 REFERENCES ...... 59 APPENDICES ...... 61

LIST OF TABLES

Table 3. 1: Sample Size ...... 25 Table 3. 2: Reliability test ...... 28 Table 4. 1: Respondents Age ...... 30 Table 4. 2: Respondents sex ...... 31 Table 4. 3: Respondents Education Level ...... 31 Table 4. 4: Work Experiences of Respondents ...... 32 Table 4. 5: Respondents on the loan amount (size)...... 33 Table 4. 6: Respondents on loan delivery mode...... 34 Table 4. 7: Respondents on the nature of loan extended to customers...... 34 Table 4. 8: Respondents on rates of loans defaults ...... 35 Table 4. 9: Respondents on cost per borrower ...... 36 Table 4. 10: Respondents on flexibility of loan repayment ...... 37 Table 4. 11: Regression Coefficients ...... 38 Table 4. 12: Respondents on Geographical coverage ...... 39 Table 4. 13: Respondents on Staff Qualification ...... 40 Table 4. 14: Respondents on Breadth and outreach ...... 40 Table 4. 15: Respondents on Firm Size ...... 41 Table 4. 16: Respondents on effect of Management efficiency ...... 42 Table 4. 17: Respondents on effect of Technology adoption ...... 42 Table 4. 18: Regression Coefficients ...... 43 Table 4. 19: Respondents on the effects of level of savings ...... 44 Table 4. 20: Respondents on Number of borrower ...... 45 Table 4. 21: Respondents on Long term debt financing ...... 46 Table 4. 22: Respondents on Non-Repaid Loan ...... 46 Table 4. 23: Regression Coefficients ...... 47

LIST OF FIGURES

Figure 2. 1: Conceptual framework ...... 21

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CHAPTER ONE INTRODUCTION 1.0 Introduction This section of the study present fundamentals of the rest of the chapter, the section offers the background to the problem, the problem that led to this the study; it presents the objectives of the study which had been grouped in twos which are general objective and specific objective. This section also presents the research questions, the rationale of the study, the scope of the study and organization of the study have been presented.

1.1 Background of the study Poverty is a main setback of most third world countries (Kiiru, 2013). Microfinance is one of the institutions that can successfully provide solutions to eliminating the poverty in emerging economies. Microfinance assists the community by improving their levels of income and reduces their vulnerabilities. They also act as a tool to promote self- employment among the community and hence improve their welfare. The low-income groups of individuals are the ones that depend the most on micro lending. Main purpose of microfinance institutions as spearheads towards development to facilitate and include the financially excluded segments in our communities as a means of reaching targets of development (Ledgerwood, 1999). These targets include eliminating the rates of the underprivileged, enabling the lower income and other deprived groups to be financially independent, creating employment opportunities, creation of new business ventures, and promoting the growth and longevity of current business ventures by injecting capital.

According to a World Bank study (2014), about lending for small and micro-enterprise ventures, the MFI objectives that were repeatedly mentioned were; • To increase and improve creation and expansion of micro-enterprises that would later generate more income opportunities and employment, • To assist the vulnerable groups in our society which are the women and underprivileged by increasing production and their income level,

• To decrease the dependence that most farmers and rural areas families have on drought-prone crops by helping them in diversifying their income to other crops or activities.

The microfinance facilities were introduced into the developing economics slightly more than twenty years ago. However, the widespread adoption of the microfinance model did not occur until the early 1990s. Since the mid-1990s, microfinance programmes and institutions have become an increasingly important component of strategies to promote micro-enterprise development in developing countries and specifically to reduce poverty (Colin, 2006). Microfinance institutions have been very important as they have been offering similar financial services to small medium enterprises, smallholder farmers, and to individuals which had not been offered by most of the commercial banks. Through this it was found microfinance is one of the very effective ways of fighting poverty as it focuses on poor who cannot afford some services by formal commercial banks (Green, 2012)

WB (2016) mentioned that microfinance institutions have been serving around 16 million people over the world a number. This is implies that a majority of people are still in need of services offered by microfinance institution especially in developing economies. Furthermore the report by UN (2016) mentioned that microfinance institutions, which increased the rate of new businesses created by these families, had served around 500 million families. In the Microcredit Summit in Washington DC there was a goal set as to reach 100 million of the world poorest people by providing credits from the world leaders and major financial institutions, hence the year 2005 was proclaimed as the International year of Microcredit by the economic and social council of the United Nations (UN). The aim was to fuel the strong entrepreneurial spirit of the poor people around the world with specific goals. The main aim was to promote the growth of microfinance and improve the performance of microfinances (Yannus, 2010).

In developing countries the role of microfinance institutions cannot be underestimated as it serves different activities such as savings, fund and credit transfers to small scale and medium business/ enterprises Anaman and Pobbi (2019). Its relevance can be observed from the work of Mahmood and Matlay (2014) when they unveiled that MFI have been a backbone to most of small business, which provides employments to more than 70% of the population in developing countries. According to (Ahmed, 2014) microfinance institutions are registered and specialized firms that intends to support low-income enterprises with financial services including of savings, loans and microcredit that focuses on increasing the economic efficiency of small-scale enterprises, in the rural areas, semi-urban (peripheral) and urban cities. Basically, the MFI are aiming at providing easy and accessible financial services to the local community, which is not served by the other financial institutions including commercial banks.

In most of the developing countries, most of its nationals have no access with formal banking services hence requires the individuals to rely heavily on the financial services provided by MFIs. In boosting the income that later on support creation of jobs, increasing entrepreneurs, innovators, improving living standards and creating successful business practitioners. For instance, in Uganda majority of entrepreneurs were impeded with the lack of enough capital to run their businesses. The same applied to microfinance institutions that were hindered by high operating expenses that hindered properly provision of monetary services to the nationals. Thus presence of clear laws, rules and regulations on operating and formalizing the microfinance, Uganda has witnessed the gradual growth and sustainability of MFIs Rahman and Mazlan (2014).

In Tanzania, Microfinance sector has experienced pertinent growth on the legally practicing MFIs whereby Microfinance institutions can be categorized as Non- governmental organizations (NGOs), Cooperative based institutions namely SACCOS and SACCAs while the third category is banks. The major players in the NGOs category include PRIDE Tanzania, FINCA (Tanzania), Small Enterprise Development Agency (SEDA) and Presidential Trust for Self-Reliance (PTF). Others, which are

relatively smaller in size, include Small Industries Development Organization (SIDO), YOSEFO, SELFINA, VICOBA, Tanzania Gatsby Trust, Poverty Africa and the Zanzibar based Women Development Trust Fund and Mfuko. There rest consists of very tiny programmes scattered throughout the country mainly in the form of community based organizations (CBOs). Banks that are actively involved in microfinance services delivery include the National Microfinance Bank (NMB), CRDB bank, Akiba Commercial Bank (ACB) and a few Community/regional banks namely, Dar es Salaam Community Bank, Mwanga Community Bank, Mufindi Community bank, Kilimanjaro Cooperative Bank, Mbinga Community Bank and Kagera Cooperative Bank.

It is estimated that all the MFIs in Tanzania put together serve a combined client population of about 400,000 SMEs, which is only around 5% of the total estimated demand. Commercial banks including community banks account for around 50,000 while the NGO category accounts for the an estimated population of 220,000 clients. PRIDE Tanzania being the largest single player accounts for about 29% of the market share in this category or 16% of the existing total market share. Microfinance institutions (MFIs) have therefore become the main source of funding for micro enterprises in Africa and in other developing regions (Ghikas 2013). Microfinance institutions have become an important contributor to the Tanzanian economy. The sector contributes to the national objective of creating employment opportunities, training entrepreneurs, generating income and providing a source of livelihood for the majority of low income households by financing the businesses that they run. The government and its development partners have spent considerable amount of resources in crafting policies and programs to build the growth of microfinance institutions.

Despite the tremendous growth of the Microfinance sector in Tanzania however the study conducted by Malik (2012), Mabrouk (2017), Zhaick (2018) show most of these institutions experience operational difficulties after 3rd year of their operations, due to financial difficulties, thus this study aims to analysis factors that affecting financial performance of microfinance institution in Tanzania by taking YETU Microfinance Bank Limited as a case study.

1.2 Statement of the Problem The initiation of MFI’s in several developing countries particularly in Tanzania was attributed with the main goal of poverty eradication of low-income individuals through providing several services such as saving, credits and payments; and insurance cover to individuals and saving groups Chijoriga (2000). Further, there are other MFIs that provide other non-financial services including business consultation, financial management, marketing assistance and training to their clients Kessy & Urio (2006). Thus, these licensed MFI and other financial institutions serve significantly on enhancing income capacity of low-level households Randhawa & Gallardo (2003).

Several researchers including (Muturi, 2000; Mkwizu, 2004; FSAP, 2003; and Seibel, 2001) piloted their studies on the financial performance of MFI’s in different emerging economies particularly Tanzania. Findings from the study revealed that, MFI’s financial performance and outreach have been hindered with severe challenges consisting of inadequate saving mobilization, high operational costs which cause unavailability of credit services (Chijoriga 2000).

Provision of microfinance services that can have a sustainable impact on clients’ wellbeing and reduced vulnerability is not an easy endeavor. Microfinance institutions face many risks that can adversely affect their long term growth, operational and financial sustainability (Jeyanth, 2003). Furthermore as National Microfinance Policy 2017 pointed out that, poor saving culture from households, led to shortage of working capital to most of MFI’s. For instance, most of SACCOS and MFI’s have been challenged with poor saving habits of their members which result to the MFI’s having low funds to meet several functions like increase in operation expenses and poor provision of loans to their members. Other related outlined challenges including, weak institutional capacity which has limited the institution capacity by ways of outreach and in the number of clients they can serve; poor portfolio quality also limits the performance of these institutions, the weak form of the government organization, lack of proper administration structure, and recordkeeping and financial disciplines.

At the same time the growth in the microfinance industry which is characterized by an increase in the breadth and depth of outreach of existing microfinance institutions, heightened competition among microfinance service providers, diversification of product and service offerings, and the presence of private and commercial funds for microfinance activities that do not lead to the expected performance of the Microfinance Institutions. To improve the performance of the MFI’s the government has to ensure it continues providing financial support to the small entrepreneurial business has conducted several efforts. The introduction of the first National Microfinance Policy in 2000, which was reviewed in 2017 aimed at motivating the operations of microfinance and also provision of special interest, offered by commercial banks to offer microfinance services are some of the efforts made by the Government to improve and motivate the operations of the microfinance institution. Despite these efforts the performance of microfinance has not improved as per the expectations (Green 2012), Chijoriga (2000), Millita (2017).

Therefore, this study analyzes the factors that affect the financial performance of MFI’s in Tanzania by taking YETU Microfinance Bank Limited as a case study through highlighting adding distinguishing on the impact of quality of loan portfolio, institutional capacity and saving mobilization and outreach on financial performance of MFI’s.

1.3 Main objective of the study 1.3.1 General objective The general objective of the study was to analyze factors affecting financial performance of microfinance institutions in Tanzania.

1.3.2 Specific objectives i. To examine impact quality of loan portfolio on financial performance of MFI in Tanzania ii. To determine the impact of institutional capacity of MFI on the financial performance in Tanzania

iii. To examine impact of saving mobilization and outreach of MFI on financial performance in Tanzania

1.4 Research Questions i. What is the impact of quality of loan portfolio on financial performance of MFI in Tanzania? ii. What is the impact of institutional capacity on financial performance of MFI in Tanzania? iii. What is the impact of saving mobilization and outreach on financial performance of MFI in Tanzania?

1.5 Significance of the study The findings of this study are expected to be beneficial to a number of people and groups.

This study will be very useful to the various stakeholders of microfinance institutions in Tanzania. The findings will be useful to the management of not only YETU microfinance but also the management of other microfinances in determining factors affecting the performance of their microfinance. The findings will help them to take measure on how to improve their microfinance institution’s performance.

The findings of this study will also be used to the general public, as people will get, knowledge on different factors affecting financial performance of microfinance institutions.

The study will be useful to the policymakers such as the government who are the regulator of microfinance institutions in Tanzania. The outcome of this research will provide a resourceful report with guides to assist policymaking and observing these institutions so as they work in accordance and adhering to all the requirements. The government as the controller of the institutions, the results from this research will assist the financial authorities in developing and improving their policies. The policymaker

will articulate policies geared towards enhancing the performance of microfinance institutions through regulation that encourages the stability of organizations.

This research serves to provide more insight to fellow students. The report will aid as empirical review to other researchers on the same topic.

1.6 Rationale of the study This study was carried out with the purpose to assess the factors, which are quality of loan portfolio, institutional capacity and saving mobilization, and outreach and analyze if they impacted the financial performance of YETU microfinance bank. The research examined the impact of the mentioned factors based on the department managers; branch managers and bank officials viewed the impact on the financial performance of the organization.

1.7 Scope of the study The scope of the study is based on analysing the factors affecting financial performance of MFI’s in Tanzania: a case of YETU Microfinance bank. The study was based at the YETU Microfinance Head Office, which is based in Dar es Salaam. This paper applied the descriptive study design; a case study was adopted because it gives exhaustive data concerning a topic. The main branch was selected because majority of the operations are carried out there. Furthermore, the study covers from 2013 to 2019; whereby the researcher believed that the timeframe is relatively enough on collecting data that will be well analysed

1.8 Organization of the Dissertation The report was categorized to six sections; whereby the first one covers the background of the study, followed by statement of the problem, general and specific objectives, research questions, scope of the study, rationale of the study and rational of the study. In chapter two highlights on the literature review that reveals meaning of the key terms, empirical review, theoretical review, research gap and conceptual framework. The methodology had been presented on the third chapter of this dissertation which had presented the type of the study, area of the study, study population, sample size and sampling techniques, types and source of data and data analysis methods. Chapter four will later present the findings that have been analyzed after conducting data collection. Chapter five unveils the discussion of findings and that related to the literature review and research objectives. Chapter six explains on the conclusion of the study, limitation of the study and policy implication.

CHAPTER TWO LITERATURE REVIEW

2.0 Introduction This chapter highlights on different definitions that are related to the study; theoretical framework; empirical framework that will reveal the work of other researchers on analysis of factors affecting financial performance of microfinance institutions. This section also illustrates the conceptual framework that reveals the dependent and independent variables of this research.

2.1 Definition of Key terms This sub-section explains the meanings of main terms used in this study. Theories discussed include, Microfinance institution and financial performances. This chapter describes the relationship between the variables.

2.1.1 Microfinance Institutions As defined by URT (2017) Financial Institutions means an entity engaged in the business of banking, but limited as to size, location served, or permitted activities, as prescribed by the Bank of Tanzania or required by the terms and conditions of its license. Furthermore the Bank of Tanzania (2017) explained Microfinance Bank means banking institution licensed by the Bank of Tanzania to undertake banking business mainly with individuals, groups, micro and small enterprises of low-income population in the rural or urban area. It means the provision of financial services including micro saving, microloan, micro insurance, micro leasing, micro housing micro pensions, money transfers, financial education and business development to the low-income population (individual, household, enterprises) that are systematically excluded from the financial system (ibid).

According to Gonzalez and Rosenbert (2006) microfinance is "financial services for poor and low-income clients" While this definition offers a good starting point, it is helpful to further clarify what is typically associated with the term 'microfinance'. Broadly, the idea and practice of financial services for the poor is not new. For example, informal savings and credit associations for impoverished communities have existed 10

for centuries in many countries around the world (Helms, 2006). However, when the term 'microfinance' is used today, there is a general understanding in the industry that one is referring more narrowly to the movement that has taken shape over the last four decades built around a more specific financial model. It is common for this movement to be referred to as "modern microfinance" (Trezza, 2006) or the "new microfinance" (O’Neill, 2012). So for the purpose of this study the MFI’s refers to a firm engaged specifically to provide microfinance product or service to its customers as stated above.

2.1.2 Financial Performance Shodhganga (2018) shows that financial performances as the degree on which firm had achieved its financial results. In another way, it refers to the degree to which the institution achieved its financial objectives. It is the process of measuring the results of a firm's policies and operations in monetary terms. This involves monetary measurement of the results of a firm’s policy and operations. A procedure of checking a firm’s financial health over a given timeline and comparing the results with those of other similar firms of the same industry.

According to Arthur et al (2013) financial performance of MFIs is the ability of the institution to operate efficiently in its management of its resources and attaining of objectives, profitably and survival of growth in quantitative terms, thus financial performance can be defined financial performance as the act of performing financial activities to a degree by which the financial objectives are met in cash form.

Furthermore Green (2012) shows, Financial Performance is the term used to refer to the degree to which financial objectives being or has been accomplished and is an important aspect of finance risk management. It is the way toward estimating the consequences of an organization approaches and tasks in money-related terms. It is utilized to quantify firm general budgetary wellbeing over a given timeframe and can likewise be utilized and be used to compare another firm of the similar industry.

Further evaluating the financial well-being of a business permits management in making their long term and short team decisions So for the aim of this study financial performance will mean the measure of how well a firm can use assets from its primary mode of business and generate revenues

2.2 Theoretical Perspectives: This part elaborates different theories, which guided this research. The segment is divided into two main categories, general theoretical context and the models, which steered the study.

2.2.1 General Theories The following part describes in detail on different reviews on factors affecting the performance MFI’s especially in Tanzania. The section provides details on rationale of different factors that are important on performances of microfinance institutions in Tanzania

2.2.1 Factors affecting performance of MFI’s 2.2.1.1 Capital The capital is important in any organization as it stimulates the public confidence and guarantees the development of the institution (Ledgerwood, 1999). According to Rose and Hudgins (2010) an institution that has a vast accessibility of capital allows it to acquire different facilities and services. Capital plays the function of assisting the everyday functions of the organization and guaranteeing its extensive viability. This indicate the amount of risk the owners are willing to take, acts as buffer in absorbing losses and it indicates the cost of financing method used (Hasan & Aykut, 2014). Capital adequacy is measured using capital adequacy ratio (Dang2011).

The study by Green (2012) mentions an existence of a significant affiliation among capital and profitability of any Microfinance institutions. It is supported by Abreu (2002), who found that banks, which possessed sufficient capital, experienced minimal funding costs and lower bankruptcy costs which resulted into higher profitability. Panjay (2012) found microfinance institutions with less leverage had a financial 12

performance that was better than more leveraged ones. Ngondwe (2011) find that Return of Assets of microfinance institutions was negatively affected by leverage.

2.2.1.2 Loan Portfolio According to Milita (2011) one of the biggest assets of any microfinance institutions is loan portfolio. Loan portfolio is the loan asset that helps to generate income. The profits will be determined by the value of loan portfolio. The loan quality together and risk associated with the asset can be a challenge to measure. Portfolio quality is the greatest source of risk for MFIs and therefore an important area to assess performance. Delinquent loans are the biggest source of risk for MFIs (Dang, 2011). For MFIs having loans that are not adequately covered by sufficient collateral, it is imperative to have a quality portfolio (Jansson, 2002).

A determinant of bank profitability is quality of portfolio of loans, which exerts influence on profitability of banks. Credit risk is the biggest risk facing banks and losses are incurred from delinquent loans (Dang, 2011). Good proxies for asset quality are non- performing loan ratios. Banks strive to have low levels of non-performing loans since it affects their profitability. Good health of a loan portfolio is indicated by low non- performing loans to total loans ratio. A better performing bank has a lower ratio (Nazir & Sangmi, 2010).

2.2.1.3 Management Efficiency Another important element in functioning of any MFI is how the managements perform. This is sometimes called management efficiency. It’s a key element which can influence banks profitability. The Management efficiently of any institution is measured by how the operations of that institution are efficient. This can be checked considering the expenditure and revenue. Management performance is usually qualitatively expressed subjectively by quality of staff, control systems, organizational discipline and management systems evaluation. In most cases financial ratios had been used to determine and measure the management efficiency by deploying resources, minimizing operating costs, and maximizing income. 13

The expenditure to income ratio is one of the ways to measure the management efficiently of any institutions (Chibber, 2009). The management of Microfinance institutions is said to be efficient if the income is high compared to the expenditure or operating expenses to total income based on income generation and operational efficiency. Operating expenses are determined by the quality of management which eventually impacts profitability (Mbithi, 2013).

2.2.1.4 Liquidity Liquidity is defined as capacity of bank to offset its immediate obligations, such as depositors, as they mature or fall due. According to Idama et al. (2014) liquidity risk in a microfinance bank arises when payment obligations fall due or cash requirements are not met in a timely and cost-efficient manner. Bank profitability has a positive correlation with an adequate level of liquidity (Dang, 2011). According to Ongore and Kusa (2013), banks holding high levels of liquid assets usually have a small capital buffer target and are more willing to have increased levels of risk. Marketable securities and cash are regarded as the most liquid assets.

According to Ayaydin and Karakaya (2014) liquidity risks in a bank can be reduced by high cash holding which could contribute to their stability. High liquid assets that back demand liabilities of a bank lead to reduced liquidity risk and margins of the bank. Microfinance banks having insufficient liquidity are less immune towards future uncertainty, are unlikely to meet growth targets, have an increase in risk around the portfolios and delays in refinancing (Brom, 2009). For microfinance bank to reduce liquidity risk, each branch will have to draft a daily funding plan that matches the cash inflows from deposits and loan repayments with the cash outflows (Idama et al., 2014).

2.2.1.5 Loan Size The financial performance of MFIs is significantly and positively affected by size (Cull et al, 2007). Size as a variable is important since it highlights the economies of scale or diseconomies of scale. Organizations benefit from synergies and economies of scale up to a definite level of size. Past the given level, the organizations grow and become

complex where the diseconomies of scale set in. According to Muriu (2011) for MFIs that are not profitable it is due to their inability to achieve economies of scale. According to Hermes et al (2011) MFIs’ size is measured by assessing the value of the assets. As a proxy of size, natural logarithm of MFIs’ total assets is employed (Cull et al. 2007) indicated that loan size negatively affected financial performance. Further, by controlling the other variables financial institutions that give smaller loans do not make fewer profits.

2.3. Specific Theories They are analytical series of arguments developed from existing empirical evidences. The following models and theories will direct this study.

2.3.1 Micro Credit Theory The inner factor of this theory is called social consciousness-Driven capitalism. This theory had been advanced by Yunus, (1998). According to the theory, the firm operating on a profit basis always cares about the welfare of its customers can be comprehended. According to the theory is likely to formulate capitalist enterprises that maximize private profits subject to the fair interests of their customers (Elahi, 2004).

Foundation of the theory is up-front. Though altruism is not totally absent, Capitalism is created largely on the idea that human beings are selfish individuals naturally. Accordingly, to the theory people who get into business do it with the main intention of profit making, the care for their customers usually is not their main purpose. This theory had been very limited to this kind of business, ignoring those businesses that are caring about their customers. A more generalized principle would assume that a small business maximizes a bundle consisting of financial profit and their social welfare

According Elahi, (2002), the theory is dealt with three groups of businesses. There are those traditional capitalists who are only concerned about the financial returns and firm profits. Secondly, those institutions that maximize their social return and lastly, those who combine both in making their investment decisions under the additional constraint that financial return cannot be negative. The last group consisted of microfinance enterprisers who are to be treated as socially concerned people, and microfinance, which is to be treated as a social consciousness-driven capitalistic enterprise.

2.3.2 Traditional theory of capital structure This theory states that a high market value of assets is obtained only when the WACC (Weighted Average Cost of Capital) is minimum only then can an optimal capital structure exists. It is reached by consuming a combination capital that includes both equity and debt. The firm has the opportunity to increase or decrease its leverage when the marginal cost of debt and equity are calculated including another mix of debt and equity financing that is not calculated.

According to this theory, the value of the firm begins to increase to definite level of debt capital then remains constant before beginning to descend if the amount of borrowing is high. Overleveraging leads to the decrease in value of the firm after the debt’s tipping point. But a firm with no leverage will have its WACC value the same as its equity financing and can deduct the WACC by an addition debt to reach a point where the marginal cost of debt is similar to the marginal cost of equity financing. The firm will encounter an exchange of the values of increased leverage versus the increasing cost of debt, due to the fact that borrowing costs rise to cancel out the increased value. Above that point additional debt will lead to an increase in the market value, which will increase the capital cost. Therefore a combination of debt and equity financing could lead to a firm’s optimum capital structure.

The theory explains that wealth is not formulated by the investments in assets that produce positive ROI; acquiring the assets with an optimum combination of equity and debt is key. Most assumptions are proved when the theory is used; this implies that cost of capital relies on the level of leverage.

This model had been adopted on this study as it explains in what way capital structure affects institution’s performances. Microfinance institutions they have different form of capital structure which can hinder their performances.

2.4 Review of Empirical Studies 2.4.1 Empirical Studies outside Tanzania Awaworyi (2014) and Mar (2014) in their study on the sustainability and outreach of MFIs indicated that MFIs in South Asia (SA) have to issue larger amounts of loans than those in Latin American Countries (LAC) for one unit increase in profit margin and one unit increase in OSS. Their studies also showed that MFIs in LAC experienced a reduction in the outreach compared to those of South Asia (SA)

In another study by Agarwal (2010), revenue, expenses, financial structure, efficiency, risk and productivity were the parameters used to measure the financial performance. His findings indicated that Indian MFIs were following sound risk management practices thus maintaining good capital to asset ratio; the efficiency was also recorded to be good. However productivity was poor as the manpower was not fully utilized by the MFIs. MFIs in India, Pakistan and Bangladesh were found to be efficient with Bangladesh MFIs being more efficient, however the inefficiencies faced in these countries were mainly due to technical faults such as unqualified managers (Tahir and Tahrim, 2013). Bangladesh also leads in Asia for its profitability performance.

The study conducted by Wassie et al., (2019) on measuring financial performance of MFI’s in Ethiopia found that the unbalanced panel data from 2000 to 2017 on 15 microfinance institutions. Data were online collected from microfinance information exchange (MIX) and association of Ethiopian microfinance institutions. The study measured various performance indicators and variables such as return on assets (ROA),

return on equity (ROE), financial self-sufficiency (FSS), number of depositors, total gross loan portfolio and number of borrowers that were used to measure both financial and social performance of MFIs. Results revealed that, the tested sample adequacy measure of Kaiser–Meyer–Olkin (KMO) was statistically significant at 0.72. In analyzing the outcome indicators, it was shown that, MFI offer services to more than 90,000 customers; it provides a gross loan of 190 million birr. Also, it indicates that more than 64% of MFIs are self-sufficient regarding financial issues. Moreover, concerning the profitability of MFIs it was found that ROA and ROE were significantly increasing which implies that MFIs use their assets commercially to invest and being able to generate more returns.

Anaman and Pobbi (2019) carried out a report on analyzing the financial performance and sustainability of MFI’s in Ghana. Their report adopted quantitative design in analyzing the substantial issues influencing the performance of MFI’s. Study adopted regression analysis model to measure profitability, liquidity and creation of credit also it analyzed the hypothesis of loan default, size of MFI and interest expenses. In the study, researchers applied correlation analysis that measured the multicollinearity to assess the situation of linear relationship between variables. Measured variables including ROA, non-performing loans, operational expenses, interest expenses, liquidity, size of MFI and tax paid by MFIs. Results analyzed basing on data from 42- selected MFI in Ghana found that, there was significant discrepancy on the maximum and minimum rate between profitability and credit creation. The profit found to be 0.1531 that implies low rate of profit to some of MFIs. Also, it is observed that, credit advanced to customers was very low which signifies that there is low credit allocation to customers. For interest expenses the value was 0.3669, which signifies that MFIs have set aside enough capital to resolve the interests’ issues. They further calculated on the interest expenses and found to be relatively higher compared to operating costs. Its implication is that, MFI management spent enough money on serving the interests payments rather than operations.

A study from (Ahmed, 2014) concerning analyzing the performance of microfinance institutions in Nigeria were carried out to a selected 64 MFIs that covered the financial reports from 2000 – 2012. Data were statistically analyzed through panel regression model on multi-dimensional data that were collected over multiple time periods. It analyzed some performance indicators such as operational self-sufficiency ratio (OSS), borrower per loan officer, operating expenses to loan portfolio, number of borrowers, and yield on gross loan and number of active borrowers. Results indicated that, the average loan balance per borrower (ALBB) is R2= .7027, p-value= .037 this implies that the increase in ALBB led to generate more operating revenue that covers management cost hence MFI performances. Also, it revealed an existence of negative connection between female borrowers and OSS; Amount of Borrowers (LNB) found significant with .000 and positive coefficient 31.948.

According to the study conducted by Abraham and Balogun, (2012) in Nigeria in which performance was measured based on the productivity and efficiency indicators, it was indicated that there was an increase in the assets, deposits and gross loan portfolio, including an increase in the outreach of about 40% of the MFIs in the years 2006-2010, this was mainly due to new entrants in the market. Their findings also indicate that the operating expense ratio for most MFIs was below 30%, which meant that these MFIs were performing relatively well.

Amin et al (2003) used a unique panel dataset from northern Bangladesh with monthly consumption and income data for 229 household before they received loans. They found out that while microcredit is successful in reaching the poor, it is less successful in reaching vulnerable, especially the group most prone to destitution (the vulnerable poor). Coleman (1999) also finds little evidence of an impact on the program participants. The results, Coleman further explains, are consistent with Adams and von Pischke’s assertion that “debt is not an effective tool for helping most poor people enhance their economic condition” and that the poor are poor because of reasons other than lack of access to credit.

2.4.2 Empirical Review in Tanzania Nkya (2004) conducted a research on the analysis of the factors that affect sustainability and financial performance of Microfinance Institutions in Kinondoni district. He used an exploratory and descriptive type of research and covers 41 SACCOS in Kinondoni district, out of 81 registered SACCOS; he concluded that MFIs should increase capacity of lending base through member’s savings so as to increase sustainability and financial performance of Microfinance Institutions. The researcher advice that the government to formulate proper policy on which will benefit SACCOS and hence poverty alleviation.

Pius (2005) conducted a research on managing operation risk as the way to improve financial performance of the MFIs by savings and credit cooperative society in Ilala Municipality. The study concluded that SACCOS as financial institutions, recognized operation risk as an important for the function of any financial intermediaries. The findings proved that the SACCOS internal control system play role in the monitoring and control the operational risk under the supervisor committee. The study further asserts that SACCOS policies and procedures need to be reworked so as to reflect the needs of members, technology advancement and obtaining circumstances. In this case SACCOS must move away from the tradition way of operating if they wish to improve their performance. SACCOS operated under the modern environment will protect the members fund from operational risks by using the insurance services available and through the improvement of external supervision.

2.5 Conceptual Framework This refers to a diagram that depicts the interrelation between two or more variables in the study (Mugenda and Mugenda 2003). The main purpose of the conceptual framework in the study is to portray related concepts that used in the study and their relationship among each other. Such a framework enhance researcher to clearly explain the concepts, show the relationship and portray the research gap Kombo and Tromp (2009). The researcher developed the dependent variable as the financial performance of microfinance institutions and the independent variable as quality of

loan portfolio, institutional capacity and saving mobilization and outreach. The figure below can clearly portray the relationship of variables,

Figure 2. 1: Conceptual framework

Source: Researcher’s own development (2020)

Referring to the above diagram the study indicated the following independent variables, which are quality of loan Portfolio, institutional capacity and saving mobilization and outreach on their effect on the financial performance of microfinance institutions.

As elaborated on the above diagram of the conceptual framework the Quality of loan portfolio is influenced by Loan Size (amount), Loan Delivery Model, Nature of the loan offered Loan Default Rate, and Flexibility of Loan repayment. Furthermore, the Institution/Microfinance Capacity can be determined by the Staff qualifications, Staff Costs, Management Efficiency, Technology Adopted and Geographical Coverage of the institution. The study further indicated that Savings Mobilization and Outreach could include the type of Outreached Clients, level of saving, number of borrowers, the interest rate on savings accounts and even the amount of non-repaid loans. These variables are said to have an impact on the financial performance of microfinance institution, the mentioned factors are the independent variable and the dependent variable is financial performance of MFI’s.

2.7 Research gap There are supportive reports regarding analyzing the financial performance of MFI’s globally and in Tanzania. For instance, a study conducted by Olapuso et al., (2014) highlighted on how MFI performance and productivity changes in Nigeria. In addition,

An analysis conducted by (Kaseva, 2014) intended to examine how MFIs supported poverty eradication in Tanzania with African Microfinance Limited as the case study. Another study was carried out by (Yohana, 2013) that analyzed the financial performance of MFI’s in Tanzania using SACCOSS in Mtwara municipal as its case study. However none of the studies have focused on how financial performance can be affected by factors such as loan portfolio, institutional capacity and saving mobilization and outreach. This study focuses on analyzing the factors and determining how they affect the financial performance. Also the case study used is one of the two microfinances in Tanzania that is registered at the Dar es Salaam stock exchange (DSE). Therefore this study attempts to analyze how the mentioned factors affect financial performance using a MFI that is registered at the DSE as its case study.

CHAPTER THREE RESEARCH METHODOLOGY

3.0 Introduction The section presents the methodology part of the report. This contains the design of the study, areas where the study was held, the population that was covered, how sampling was performed including the sample size and sampling techniques. This chapter also included kinds of data, data sources, data analysis and data reliability and validity. Lastly the ethical consideration was also portrayed.

3.2 Research design In the words of Saunders et al. (2009) research design is the master blueprint that guides a researcher on providing answers on research objectives. There are types of research designs a few being exploratory survey and descriptive research design. Nevertheless, this analysis was based on analyzing the relationship between financial performance and MFI’s thus it uses descriptive research design. Descriptive research designs has been defined by Hair et al. (2000:38) as the process of using systematic scientific techniques in collecting raw data and develop a set of data that clearly explain the features of selected population of the analysis. Furthermore, researcher used the design in order to collect the information easily from a large group of study participants so as to clearly estimate, verify, understand and validate the relationship between the two variables (independent and dependent).

3.3 Study area The study was carried out at YETU Microfinance Bank Head Office; it is situated in Dar es Salaam, Tanzania. Dar es salaam is the business center where there are different economic activities taking place. The YETU Microfinance head office was chosen because it had all the required information. The selected area was also convenient to the researcher due to its flexibility (in terms of data collection, methods and analysis), less time consuming, not expensive in collecting data and observing what was real taking place in the unit.

3.4 Study population As defined by Hair et al., (2000) populations is the groups of identified elements that are appropriate related to the study and are able to provide answers to the proposed research objectives. The study population in this research was from YETU microfinance institution registered and operating in Dar es Salaam and listed by the DSE as one among of the best performing MFIs in Tanzania, which is listed at, whereby Questionnaires were administered to finance managers of this microfinance institution.

3.5 Sampling Technique and Sample size 3.5.1 Sampling Technique According to Millita (2012) sampling technique are the techniques carried on to choose the respondents to be used in the report. These techniques are of different types, being probability and non-probability. YETU microfinance bank was chosen for this study because it is the first microfinance institution in Tanzania to be listed under the Dar es salaam Stock Exchange (DSE). Under this study all the respondents were purposively chosen because of their work and their familiarities in relation to factors affecting financial the performance of microfinance.

3.5.1.1 Non-Probability Sampling As stated by Saunders et al. (2009), this procedure provides a number of options to select samples based on researcher subjective judgment. The importance of this process is to gather mass data from chosen respondents. Purposive sampling was used for the study. The method permits an investigator to critic on the provided sample to pick required respondents that suit the researcher’s interest on answering research questions (Saunders et al., 2009).

The purposive sampling technique was applied for the study to confirm that the required and relevant knowledge is obtained from the perspective microfinance officials and in relation to their roles and position held at the workplace duties. The respondents were picked purposively due to their roles. So, the staff of YETU Microfinance Bank, head office was picked to answer the research questions.

3.5.1 Sample size It refers to a set of elements chosen in some way among a populace (Schofield, 2006). Among of many registered microfinance institutions in Tanzania, YETU microfinance was selected in representing other MFIs. This is because of its performance and being among of the registered MFI in Dar es Salaam Stock Exchange. From the microfinance the researcher selected 50 respondents including senior staffs and also some of the bank staffs.

Table 3. 1: Sample Size S/N Respondents Sample size 1 Department Heads 7 2 Credit officer 8 3 Finance officer 8 4 Loan officer 10 5 Operations officer 15 6 Branch manager 2 Total 50 Source: Researcher’s own construct (2020)

3.6 Data Collection The research design was used on this study the data were collected from both sources hence primary data and secondary data.

3.6.1 Primary Data Primary data are those data has been gathered for the aim of the study or these are the data that had been collected to fulfill the objective of the present study Saunders (2007). Normally primary data was collected direct to the respondent’s and can be collected though interview or through questionnaires. The questionnaire or interviews normally were structured or unstructured in nature.

3.6.2 Secondary Data As said by (Churchill and Brown, 2007) those that are being collected from other materials. These data had not been collected for the present study but as results of reading different other material on the subject matter. This type of data can either be already published or unpublished data. In this research the secondary data used those collected from YETU Microfinance reports, other already published materials which explain factors affecting financial performance of the microfinance and other online materials concerning the factors affecting performances of microfinance

3.7 Data Collection Methods Data approaches involved material from questionnaires but also included in-depth interviews.

3.7.1 Questionnaires According to Militia (2012) these are instruments for gathering information that can be structured and even unstructured questions. This report used structured questionnaires and included both closed but also open-ended questions. They aimed at checking different elements affecting financial performance of MFI’s. A questionnaire was used to all the YETU microfinance officials. This technique was adopted because it allowed the researcher to attain a vast sum of data at once, (Mather’s, 2009).

Researcher developed structured questions with closed ended questions that allowed respondent to choose from a set of scale points. Likert scale was adopted for measuring the scale points from which researcher asked the interviewees to designate their extent whether respondents either strongly agreed, agreed, were neutral, disagreed or strongly disagreed with the sequence of statements about the given variable.

3.7.2 In-depth Interviews Owing to on the fact that information the lead respondents had on the matter the researcher used an in-depth interview for attaining data from the lead respondents. They involved one on one discussion where the respondents were free to answer the questions asked by the researcher. The interviews were done while taking all precautions considering the presence of Coronavirus disease. The interviewer questioned the, branch managers and the heads of departments. The interviews were by appointment and based on time available per each official. The interview was done at YETU microfinance Head office were by the researcher asked for appointment of the target respondents.

3.8 Data Reliability and Validity The section elaborates on ways in which the researcher insured the data collected are valid but also reliable.

3.8.1 Data reliability It presents ways similar data results or provide consistent results if used by different researcher, Joppa (2000). This test is the best option for guaranteeing information gathered is consistent. The Pilot study, which involved conducting simple data collections to some selected group or respondents to gain their understanding on the questionnaire had been done where by the respondents were asked to fill the questionnaire form. Respondents were assured secrecy was conserved.

Cronbach’s Alpha analysis was found suitable to examine the reliability of the report. With the use of this test to evaluate the minimum scale of 0.7. Below is the test used:

Table 3. 2: Reliability test

Reliability Statistics

Cronbach's Alpha N of Items .968 18

Source; Field Data (2020)

By using the Cronbach’s Alpha test, the alpha value (α) might lie between negative infinity and one. Though, the positive figures of (α) are the ones that count. Normally, the (α) varies from 0 to 1 might be used to explain the reliability of factors obtained from dichotomous. According to George & Mallery, (2003) claim that reliability score of 0.70 or superior in order so as to use a psychometric tool. With this analysis, the (α) for the 18 items is .968, signifying the items have a relatively high internal uniformity; this (α) demonstrations an approved level of reliability (ibid).

3.8.2 Data Validity This discusses how the information was collected and it provided the accurate results. The questionnaires were checked and reviewed carefully before being given to the respondents to ensure they are correct. Since the pilot study was conducted then those questions, which were found to be not correct, were removed and replaced by new questions. The researcher ensured all the questions were corrected and understandable to the respondents. They’re after the verified questions, which were filled correctly, next step was coding into the data analysis program for the analysis. The software package had some authentication rules for some of the fields.

3.9 Data analysis Under the present study the analysis of data was performed using a statistical package called Statistic Package for Social Science (SPSS). The analysis of the data involved the tally of the frequencies and the percentages from all respondents. Broad tendencies in an order that ensures rational completeness and consistency of the responses. In ensuring the data collected were absolutely valuable the data was edited daily. All faults obtained were modified before the data was coded. Then after accumulating the records, they were transferred to the SPSS and were examined qualitatively and quantitatively.

Qualitative data analysis applied both analyses, which are content and logical analysis. The uses of thematic analysis and Nvivo in a few cases were applied to gather the qualitative data. Simple distribution and frequencies together was used to collect the quantitative data. Simple linear regression was performed to test the relationships among variables.

3.10 Ethical considerations The researcher considered the issues on ethical consideration in conducting the research. The researcher had consulted YETU microfinance senior officials to get approval on collecting relevant information regarding the research study. Also in guarantee the confidentiality the researcher presented for the data collection approval obtained from the university and which was approved by Mzumbe University.

The interviewees were requested to provide accurate information on the subject and no bias was done in selecting respondents. The research objectives were clearly explained to the respondents and respondents who accepted voluntarily participate in the research by providing some crucial information on the academic paper.

CHAPTER FOUR PRESENTATION OF FINDINGS 4.1 Introduction The segment discusses about collected data from the field, analysis and results. Mostly, the research studied the factors affecting the financial performance of MFI’s using YETU Microfinance Bank’s Head Office. The specific objectives were as: i. To examine impact quality of loan portfolio on financial performance of MFI in Tanzania ii. To determine the impact of institutional capacity of MFI on financial performance in Tanzania iii. To examine the impact of saving mobilization and outreach of MFI on financial performance in Tanzania

4.2 Socio-Demographic characteristics of the respondents Under this sub-section the socio-demographic of 50 respondents was observed. The respondents consisted of Heads of departments of Credit and Risk, Finance, Operations, bank officers and branch manager who effectively completed the questionnaire that was distributed to the organization.

Table 4. 1: Respondents Age Frequency Percent 25 - 30 6 12.0 31 - 36 29 58.0 37 - 42 14 28.0 43 – 48 1 2.0 Total 50 100.0

Source: Field data (2020)

The above table reflects the Age category whereby 29 (58.0%) of 31 to 36 years,14 (28.0%) of 37 to 42 years, 6(12.0%) of 25 to 30 years and those aged around 43 to 48 years resided at (2.0%). According the information it means that majority of the staff are around there 30’s. This implies that the microfinance bank maintains its able and experienced employees. Also, one can see that the microfinance institution under study has employed people of all ages. However, only few (2%) are above 48 years. On the other hand, if we combine those between 25 and 48 years, we have a total of 98%, probably this would be the normal situation.

Table 4. 2: Respondents sex Frequency Percent Male 29 58 Female 21 42 Total 50 100.0 Source: Field data (2020)

The data in the table 4.3 represents the sex of the respondents that were found in the study, which show that the number of males was 29 equivalents to (58.0%) and 21 (42.0%) were female. This indicates that there was adequate representation of gender in the study. It implies the microfinance provides equal opportunities to genders during recruitment. The findings demonstrate that the gender was provided equal chance and were equally willing to answer the questionnaire.

Table 4. 3: Respondents Education Level Frequency Percent Certificate 0 0 Diploma 14 28 Bachelor’s degree 31 62 Masters 5 10 Total 50 100.0 Source; Field Data (2020)

From above table 4.4, the education category was sorted into certificate, which had no respondents, diploma respondents that had 14 respondents (28.0%), bachelor’s degree, which had 31 of the respondents (62.0%), and masters, which had 5(10%) of the respondents. The results of the findings reveal that YETU Microfinance Bank recruits more staff with Undergraduate qualifications. The respondent’s level of education is important as it can provide information in making appropriate recommendation regarding the type of training that is required to improve their performance. Moreover, the levels of education when combined with work experience were also important in assessing the validity of information gathered through questionnaires. This is because the more the experienced and educated respondents, the more is likely to provide relevant information regarding MFI activities

Table 4. 4: Work Experiences of Respondents Frequency Percent 1-3 years 19 38 4-10 years 29 58 More than 10 years 2 4.0 Total 50 100.0 Source: Field data (2020)

The study also examined the respondents in terms of the duration they have been employed in YETU Microfinance Bank. The objective was to analyze their working experience with Microfinance institution. The findings show the respondents with 1- 3 years of experience are 19(38.0%) while those with 4-10 years of experience are 29(58.0%) and those with more than ten years of experience are 2(4.0%). This suggests that most of the respondents that participated are experienced and familiar with their duties at the microfinance. The results show that respondents are knowledgeable on matters related to Microfinance institution operations. Therefore, the respondents were in position to provide reliable assessment on the performance and sustainability of Microfinance institution

4.3 Findings as the Study Objectives The segment examines the outcomes from study with accordance to the research objectives and questions obtainable from the study.

4.3.1 Objective One Impact of Quality of loan portfolio on financial performance of MFI in Tanzania.

Table 4. 5: Respondents on the loan amount (size). Frequency Percent Strongly Disagree 0 0 Disagree 6 12 Neutral 7 14 Agree 19 38 Strongly Agree 18 36 Total 50 100.0 Source; Field Data (2020)

Table 4.6 reflects, 18(36%) strongly agreed, 19(38%) agreed, 7(14%) were neutral and 6(12%) disagreed. These results imply that employees at YETU Microfinance agreed that the financial performance of their bank was affected with the loan amount. This means that if the microfinance granted loan amounts to clients, who were unable to repay the loans as per the time instructed it could lead to an increase in default rates. A high number of default rates is not a positive indicator of financial performance.

This view is further supported by the study conducted by Kenya Rural Enterprise Programme (KREP) (2016) that revealed that despite the credit to have very good benefits to the recipients or borrower but sometimes if given without considering the limit can cause trouble to microfinance institution

Table 4. 6: Respondents on loan delivery mode. Frequency Percent Strongly Disagreed 5 10 Disagreed 4 8 Neutral 5 10 Agreed 21 42 Strongly Agreed 15 30 Total 50 100.0 Source; Field Data (2020)

The table shows the results, which are 15(30%) of the strongly agreed, 21(42%) of the agreed, 5(10%) were neutral, 4(8%) disagreed and 5(10%) strongly disagreed. These findings imply that the majority of the YETU Microfinance officials agreed that the loan delivery mode hence affected the financial performance of the microfinance. This means the client must be given clear and direct instructions and explanations when they are applying for a loan. The client must be aware of the interest rates and repayment period while being granted the loan, failure to provide clarity on the loan may result to failure of repayment on the client’s part due to being misinformed or not being given appropriate information. A poor loan delivery mode can lead to poor financial performance.

Table 4. 7: Respondents on the nature of loan extended to customers.

Frequency Percent Strongly agree 14 28 Agree 18 36 Neutral 7 14 Disagree 5 10 Strongly disagree 6 12 Total 50 100 Source; Field Data (2020)

The analysis reveals that 18(36.0%) of the respondents agreed, 14(28.0%) strongly agreed, 7(14%) neutral, 5(10%) disagreed and 6(12%) strongly disagreed. This suggests that the majority of the staff agreed that the nature of the loan affected the financial performance of the microfinance. Here it implies granting a large number of clients with long term loans which are usually in larger amounts, repaid monthly with lower rates of interest can lead to defaults if the client is unable to meet their financial obligation. Hence this can hinder the performance of the MFI’s if it has high numbers of long-term loans clients who fail to fulfill their repayments.

Table 4. 8: Respondents on rates of loans defaults

Frequency Percent Strongly agree 20 40 Agree 27 54 Indifferences 0 0 Disagree 3 6 Strongly disagree 0 0 Total 50 100.0 Source; Field Data (2020)

These findings reveal that 20(40.0%) strongly agree on this,27 (54.0%) agree, and only 3(6.0%) disagree. Based on the above findings it indicates that majority of the staff agreed that the rates of loan defaults affected the financial performance of the microfinance. Microfinance institutions with a high rate of loan defaults will be lead to high costs of loans; it can also cause liquidity risk on the stakeholders and owner’s interests and credit risk which is faced when the institutions faces loss of revenue due to not being able to earn the interests.

Table 4. 9: Respondents on cost per borrower Frequency Percent Strongly agree 11 22.0 Agree 18 36.0 Neutral 13 26.0 Disagree 6 12.0 Strongly disagree 2 4.0 Total 50 100.0 Source: Field data (2020)

Referring to the table 11 (22.0%) strongly agreed, 36 (36.0%) agreed, 26 (26.0%) are neutral, 12 (12.0%) disagreed and (4.0%) strongly disagreed. The analysis further reveals that cost of loan per borrower also had an impact on the microfinance’s financial performance. Cost per borrower implies the cost of maintaining an active borrower. It is calculated by dividing operating expenses to the period average number of borrowers. High costs per borrowers affects the financial performance of the MFI, because the MFI incurs more operating expenses in maintaining the borrower. The respondents mentioned this as an important condition for their positive financial performance

Table 4. 10: Respondents on flexibility of loan repayment

Frequency Percent Strongly agree 25 50 Agree 14 28 Indifferences 4 8 Disagree 2 4 Strongly disagree 5 10 Total 50 100.0

Source; Field Data (2020)

The portrayal of the above implies that 25(50%) strongly agreed. 14(28%) agreed on this, 4(8%) were neutral, 2(4%) disagreed while 5(10%) strongly disagreed.). The findings implied the respondents gave positive feedback that the flexibility of loan repayment schedules had an influence on the financial performance of the microfinance bank. Loan repayments are very important on ensuring continuity of the MFI’s. The poor loan repayments scheme affects the financial performances of microfinances.

4.3.1.7 Relationship between variable Regression analysis was applied to assess the relationship between the variables, the following results were discovered:

Table 4. 11: Regression Coefficients

Coefficientsa

Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .050 .116 .432 .668 Cost per borrower .287 .117 .256 2.460 .018 Loan Default Rate .085 .104 .052 .818 .418 Nature of loan extended to customers .317 .136 .344 2.329 .025 Flexibilty of loan repayments .052 .076 .055 .682 .499 Loan size .495 .118 .489 4.194 .000 a. Dependent Variable: Performance of Microfinances

Source; Field Data (2020)

The table 4.12 shows that the independent variables: cost per borrower, loan default rates, Nature of loan extended to customers, Flexibility of loan and loan size results into, the beta value of 0.256, .052, .344, .055 and .489 they reflect a positive correlation with the Performance of Microfinance. The table above shows the constant value of 0.050 on which formulation relationship between these variables will form the following regression equation. fs=.287cb + .085ld + .317nl + .052fl + + .495ls + 0.050 Where by fs – Performance of microfinance cb – Cost per borrower ld – Loan default rates nl – Nature of loans extended to customers fl – Flexibility of Loan repayments ls – Loan size

From the above regression equations, the findings show that by improving cost per borrower, loan default rates, Nature of loan extended to customers, Flexibility of loan and loan size by 1% then the performance of microfinance will be improved by (0.280 + 0.0852 + 0.317 + 0.052 + 0.495 + 0.050) as shown on the equation above.

4.4.2 Objective two The second specific objective examines the impact of institutional capacity on MFI’s financial performances.

Table 4. 12: Respondents on Geographical coverage

Frequency Percent Strongly agree 16 32 Agree 18 36 Indifferences 7 14 Disagree 9 18 Strongly disagree 0 0 Total 50 100.0 Source: Field Data (2020)

Based on the table 4.13 revealed that 16(32%) strongly agreed, 18(36%) agreed, 7(14%) neutral, 9(18%) disagreed. This suggests that most of the YETU Officials agreed that the geographical coverage had an impact on the financial performance. The respondents further explained that the MFI’s branches that where situated in Dar es salaam, where in areas that are highly populated with small scale entrepreneurs (i.e. the Machinga Complex branch and Mbagala branch) which enables the bank to reach a large number of clients that needed their small-scale loan facilities. They added that YETU also has two branches in Ifakara, one in Kilwa and Zanzibar and where in the process of expanding to other regions.

Table 4. 13: Respondents on Staff Qualification Frequency Percent Strongly agreed 9 18 Agreed 19 38 Neutral 10 20 Disagreed 5 10 Strongly disagreed 7 14 Total 50 100.0 Source: Field Data (2020)

The table 4.14 portrays that 7(14.0%) strongly disagreed, 5(10.0%) disagreed, 10 (20.0%) neutral, 19(38.0%) strongly agreed and the rest 9 (18.0%) agreed. The Staffs are the key operators and functioning system of the microfinance, by having qualified staff means their operations are more productive and hence improves the organizational performances. The respondents agreed that having qualified staff in their institution assisted in the positive performance of their microfinance.

Table 4. 14: Respondents on Breadth and outreach Frequency Percent Strongly agreed 15 30 Agreed 21 42 Neutral 5 10 Disagreed 8 16 Strongly disagreed 1 2 Total 50 100.0 Source: Field data (2020)

Based on table 4.15 reveals 15(30.0%) strongly agreed, 21(42.0%) agreed, 5(10.0%) neutral, 8(16.0%) disagree and 1(2.0%) strongly disagreed. The analysis further reveals that Breadth and outreach of microfinance is a very important element on the performances of microfinance. This is important as through outreach the MFI can cover and reach more people that do not have access to bank or lack the adequate security and hence improve its operational performances, while with breadth the institution is able to assess the type of client(borrowers) it has.

Table 4. 15: Respondents on Firm Size Frequency Percent Strongly agree 11 22 Agree 22 44 Indifferences 7 14 Disagree 10 20 Strongly disagree 0 0 Total 50 100.0 Source: Field data (2020)

The portrayal above shows that 11(22.0%) strongly, 22(44.0%) agreed, furthermore the study finds that 7 respondents equivalents to (14.0%) were neutral with the results and 10(20.0%) disagreed. According to the results it seems size of MFI’s affects its financial performance. The respondents also shared that large MFI’s in terms of capital structure, number of customers served and operating period are more financially stable matched to small MFI’s. This creates an opportunity for the large firm to perform better compared to small ones.

Table 4. 16: Respondents on effect of Management efficiency Frequency Percent Strongly agreed 18 36 Agreed 19 38 Neutral 10 20 Disagree 3 6 Strongly disagreed 0 0 Total 50 100.0 Source; Field Data (2020)

The above depiction was 18(36.0%) strongly agreed, 19(38.0%) agreed, 10(20.0%) neutral and 3(6.0%) disagreed. Most of them agreed that the management efficiency of the microfinance had an effect on the financial performance of the MFI’s. The respondents also revealed that institution with a management that was inefficient resulted to poor financial performance. Further, the more productive and efficient the management contributed to a positive financial performance.

Table 4. 17: Respondents on effect of Technology adoption Frequency Percent Strongly agreed 11 22 Agreed 18 36 Neutral 7 14 Disagreed 14 28 Strongly disagreed 0 0 Total 50 100.0 Source; Field Data (2020)

The researcher asked the respondents to give their views on whether the technology used by the microfinance institution had impacts on the financial performance of the microfinances. The analysis revealed that 11 equivalents to 22.0% strongly agreed, 18 equivalents to 36.0% agreed, 7 respondents, which is equivalent 14.0%, were neutral

with this and only 14 to 28% disagreed on this. Majority of the respondents agreed that technology had an impact on the financial performance, the application of systematic and computerized accounting software simplified the management of financial data. YETU microfinance bank also applied the use of finger print data system to identify its clients to enable the clients that could not read or write to be able to have access to the bank facilities.

Table 4. 18: Regression Coefficients

Coefficientsa

Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .131 .132 .991 .327 Geographical coverage .186 .157 .161 1.184 .243 Staffs Qualifications .104 .135 .106 .769 .446 Breadth and outreach .082 .105 .069 .778 .441 Firm Size .539 .163 .497 3.316 .002 Management of Microfinance .027 .110 .020 .245 .808 Technology adopted .134 .171 .148 .782 .438 a. Dependent Variable: Performance of Microfinances

Source; Field Data (2020)

According to the table above it shows that independent variables: geographical coverage, staff qualifications, breath and outreach, firm size, managements of microfinance and also technology adopted resulted into, the beta value of 0.161, .106, .069, .497, .020 and .148 which reveals an affirmative connection among variables and l performance of microfinance. The study implicates that the among variables constant value of 0.131 that formulates a relationship between these variables that will form the following regression equation.

pm=.186gc + .104sq + .082br + .539fs +.027mn + .134td + 0.131 Where by pm – Performance of microfinance gc – Geographical coverage sq – Staff qualifications br – Breath and outreach fs – Firm size mn – Managements of microfinance td – Technology adopted

From the above regression equations, the findings show that by improving geographical coverage, staff qualifications, breath and outreach, firm size, managements of microfinance and also technology adopted by 1% then the performance of microfinance will be improved by (0.186 + 0.104 + 0.082 +0 .539 +0.027 +0 .134 + 0.131) as shown on the equations above.

4.4.3. Objective three This objective examines the impact of saving mobilization and outreach of MFI on financial performance in Tanzania.

Table 4. 19: Respondents on the effects of level of savings Frequency Percent

Strongly agreed 17 34

Agreed 14 28

Neutral 7 14

Disagreed 12 24

Strongly disagreed 0 0

Total 50 100

Source; Field Data analysis (2020)

Table 4.20 portrays the results, which are, 17(34%) strongly agreed, 14(28.0%) agreed, 7(14.0%) neutral, and 12(24%) disagreed. According to the results a majority of the population agreed that the level of savings in microfinance had an impact on its financial position. The respondents explained that savings are a way for the MFI to gain capital formation enabling the MFI to grow, expand and better serve the community. To attain this YETU microfinance has a saving product that acts as a collateral for individuals that have taken loans. Whereby the borrowers are supposed to deposit at least 15% of the amount borrowed as a collateral.

Table 4. 20: Respondents on Number of borrower Frequency Percent

Strongly agreed 18 36

Agreed 17 34

Neutral 4 8.0

Disagreed 6 12

Strongly disagreed 5 10

Total 50 100

Source: Field data (2020)

The results reflect, 18(36.0%) strongly agreed, 17 (34.0%) agreed, 4 (8.0%) neutral, 6 (12.0%) disagreed and (10.0%) strongly disagreed. The respondents further revealed that the number of borrowers that Microfinance institution have also had much impact on the performance of the microfinances, this is because the more the clients the more the loans will be dispersed and which will lead to an increase in the MFI’s earnings.

Table 4. 21: Respondents on Long term debt financing Frequency Percent

Strongly agree 13 26

Agree 20 40

Indifference 5 10

Disagree 7 14

Strongly disagree 5 10

Total 50 100

Source; Field Data (2020)

The above table portrays the results which are, 13(26.0%) strongly agreed, 20(40.0%) agreed, 5(10.0%) neutral, 7(14.0%) disagreed lastly 5(10%) strongly disagreed that long term debt financing extended to borrowers has direct impacts on the performances of the MFI. Long-term debts are those that are required to be repaid after a year or more. According to the respondents these long-term debts positively impacted the financial performance because it provided the borrower ample time to repay the loan and lowered the default rates.

Table 4. 22: Respondents on Non-Repaid Loan

Frequency Percent Strongly agreed 12 24.0 Agreed 14 28.0 Neutral 8 16.0 Disagreed 9 18.0 Strongly disagreed 7 14.0 Total 50 100.0 Source; Field Data (2020)

The table above displays that 12(24.0%) strongly agreed on this, 14(28.0%) agreed, 8(16.0%) are neutral, 9(18.0%) disagreed and 7(14.0%) strongly disagreed. These results suggest the microfinance had to take carefully the issue of loan repayments as it had direct impacts on the profit margin of microfinance and hence performance of microfinance. The high the rates of non-repaid loans could decrease the financial performance of the MFI.

Relationship between variable- Regression models After the regression analysis was conducted among the variables (independent and dependent) the following was unfounded

Table 4. 23: Regression Coefficients

Coefficientsa

Unstandardized Standardized Coefficients Coefficients Model B Std. Error Beta t Sig. 1 (Constant) .021 .081 .259 .797 Level of Saving .040 .037 .042 1.091 .281 Non Repaid Loan .227 .086 .246 2.631 .012 Long term debt financing .613 .108 .575 5.677 .000 Number of borrower .204 .087 .207 2.337 .024 a. Dependent Variable: Performance of Microfinances

Source; Field Data (2020)

Table 4.24 shows the independent variable level of saving, non-repaid loan, Long term debt financing and Number of borrowers resulted into, the beta value of 0.042, .246, .575, and .207 that reflect an optimistic relation between the independent variables and Performance of Microfinance. The above illustration shows the analysis with constant value of 0.021 on which formulation relationship between these variables will result to the following equation.

pm=.040ls + .227nl + .613ld +.204nb + 0.021 Where by pm – Performance of microfinance ls – Level of savings nl – Non repaid loan ld – Long term debt financing nb – Number of borrowers

From the above regression equations, the findings shows that by improving level of saving, non-repaid loan, Long term debt financing and Number of borrower by 1 unit then the performance of microfinance will be improved by (0.040 + 0.227 +0.613 +0.204 + 0.021) as shown on the equations above.

CHAPTER FIVE DISCUSSION OF THE FINDINGS 5.1 Introduction The section illustrates the discussion of the results which are in line with the research objectives and depiction of other scholars.

5.2 Discussion of the study as per research objectives and findings 5.2.1 The impact of quality of loan portfolio on financial performance of MFI in Tanzania. The findings of the study reveal different factors related to the loan portfolios that affect the financial performance of the microfinance. The analysis revealed that the loan amount (size) is one important factor related to loan portfolios that affects the financial performance of microfinance. This study uncovers that more than 62% of YETU Microfinance officials agreed. According to the respondent’s customers who defaulted on loan amounts that where high ended up negatively affecting the MFI’s financial performance. Therefore, the amount of loan given to customers had an impact on the financial performance. The study by Millita (2012) conducted on the challenges facing microfinance in emergent nations disclose that majority of microfinances are faced with the problem of loan collection which impacts their operations.

The study also finds that the loan delivery mode is another issue that influences the performance of microfinance. The study uncovers 74.0% of the respondents strongly agreed on this. Furthermore, a study by Ngaruko (2012) reveals similar results as it shows there is a positive connection amongst loan delivery mode and the performance of microfinance. According to this study, the loan delivery mode can be a source of interest to the microfinance but it also shows the trust of the customer. It was further revealed that the nature of the loan provided to the customer impacts the financial performance of the microfinance. The study reveals that the short-term loans are easily collected and hence had a good performance to a microfinance compared to long term loans.

The respondents also agreed that the loan repayment schedules affect the financial performance of microfinance because sometimes customers delay paying their loans which leads to loan defaults. This had been supported by 74% of the respondents. The study by Isaack (2019) conducted in Mvomero Morogoro, find that flexible loan repayment schedules reduced the EMI (Equated Monthly Installment) burden on the client and lowered the default rates. This factor also had a positive impact on the financial performance of the MFI’s.

Furthermore, the study revealed that rates of loan defaults highly affect the financial performance of MFI’s. The findings disclose 94.0% of the respondents agreed on the impact. These findings are similar to the finding by Andress (2010) while studying the works by Welmon, (2008), discovered that loan default is a challenge to most of the incoming microfinance institutions in Africa, this makes most of the institutions fail because of losing a lot of funds.

5.2.2 The impact of institutional capacity of MFI on financial performance. The findings of the study reveal factors such as geographical coverage, staff qualification, breath and outreach, organization size, managements of the microfinance and even the technology adopted had impacts on MFI’s financial performance.

The results of the report reveal the breath of microfinance and its outreach is the source of its performances, the more coverage the microfinance has, leads to more customers and hence more loans given out to the customers. An increase in the loans provided means the interest rates are high and hence the positive financial performances of the microfinance. The study by Nyagone (2012) steered the report on the impacts of the loan default on financial sustainability of microfinance in Nigeria find that the outreach of microfinance is one of the main factors in the financial performance of MFI’s.

Also, this study finds that geographical coverage of microfinance is one of the significant elements that impact the financial performance of MFI’s. The results of the study, had been concluded by 68.0% of the respondents. The study by Lusanjara (2008) on the performance of microfinance in Kenya reveals a positive relation among the 50

microfinance geographical coverage and performance of microfinance. Also, these findings imply that before the microfinance institutions decide to open new branches, they need to consider the location as it has major impacts on their business operations and also their financial performances.

Staff qualifications is another factor that the study found that strongly impacts the microfinance financial performance. According to the respondents the more the qualified staff the more the chance for new ideas and strategies in the business. This had been mentioned by 56% of the respondents. These results suggest a need for the microfinance institution to ensure they hire qualified staff that will perform efficiently and ensure a positive financial performance of the microfinance.

Also, the results of the study exposed that firm size is very important in the determination of financial performances of microfinance. The respondents mentioned that larger institutions are more financially stable than compared to small firms. This gives them an opportunity to perform better compared to small firms. The study conducted by Luoh (2008), finds that most financial institutions in developing countries experience challenges in their operation due to their accessibility and coverage. These results are comparable to the outcomes from a report by Millita (2011) in northern Kenya using Tujijenge Bank whereby it reveals that size and coverage of this microfinance affect its financial sustainability. These findings also align with the findings that, the number of branches was found to have impacts on the financial performances of microfinance as it helps to widen the operations of microfinance. The respondent mentioned that sometimes one branch could cover the loss of another branch. 70% of the respondent agreed on this. These studies are also similar to those by Ngonke, (2008), finds that the size and number of microfinance branches had been key motivating factors to most of the MFI’s -in northern Ghana.

This study revealed that the management of microfinance had major impacts on the performance of MFI’s. Managements are responsible for the supervision of the operations of microfinance, in setting the strategies and ensuring the successful consumption of microfinance funds. The investigation uncovers 65.0% of the bank staff agreed. The findings are similar to Mein (2009), Zhang (2005) and also Vijah 51

(2012) who’s their studies find a positive relationship between the management of microfinance and the performances of MFI’s.

5.2.3 The impact of saving mobilization and outreach of MFI on financial performance in Tanzania The findings reveal that there are several factors related to saving mobilization and outreach of microfinance institutions' that seems to have an impact on the performances of microfinance.

The level of saving that the microfinance had was found to be one of the reasons for the positive financial performance of microfinance. The respondents mention that the more the saving at microfinance the higher the performance of microfinance. This was agreed by 62% of the respondents. The results are similar to the findings by Ndunge (2012) on the challenges facing microfinance organizations operating in emerging economies, elaborates upon the impacts of deposits on financial sustainability. The study mentioned that as microfinances are dealing with sales of loans then they need more cash in order to be liquid and provide services to wider population. This impacts the financial performances of microfinance.

Furthermore, the study reveals that long term debt financing is a key ingredient that affects the performance of the MFI’s. The analysis bear that 66% of the respondents agreed. These results related to the findings by Slachlon (2008) who finds similar findings that positive relationship exist between the financial performance of microfinance and long-term financing of microfinance institutions. The outcomes are the same as those of Haen (2011) revealing an existence of a positive relationship between long-term debt financing and organizational performance.

Furthermore, this research reflects that loan default rates have high impacts on the financial performance of microfinance; this had been approved by 52% of the respondents. The results are related to the analysis by Porteous (2006) reveal similar results that the management of loans is a key factor and failure to manage loans will increase the rate of bad debts(loans) and hence affects the financial performances of the microfinance. 52

The numbers of borrower’s microfinances have also seemed to affect the performances of MFI’s. The analysis, it had been revealed more than 70.0% of the respondents also agreed and the respondents mentioned that the more the loans are disbursed in the market the more the chance of high performance considering the interest rates will be high. These discoveries are somehow contradicting to the findings by Mgoya (2017) whose findings disclose that despite having affirmative impacts on performance of microfinance the number of borrowers if not carefully controlled can have negative impacts on financial performances of microfinance. These findings imply that microfinance institutions need to carefully analyze their liquidity before offering loans to their clients, the institution need to ensure that they remain with enough funds to facilitate its operations even in case there are challenges on loans collections.

When reassessing the study by Donner (2005) in northern Rwanda, it revealed that most of the microfinance institution failed to function due to financial liquidity. The study stated that most of the institutions failed to maintain their operations due to the deficit on operation funds. This is because most of the institutions fail in paying their staff timely which demoralizes them and may lead to poor performance.

The above findings had also been approved and concluded by the regression analysis which showed that it is a substantial relationship among these variable and the financial performances of MFI’s.

CHAPTER SIX SUMMARY CONCLUSIONS AND POLICY IMPLICATIONS

6.1 Summary The overall objective of this report was to analyze factors affecting financial performance of MFI’s in Tanzania using YETU Microfinance Bank’s Head Office. The specific objectives of the study searched for: i. To examine impact quality of loan portfolio on financial performance of MFI ii. To determine the impact of institutional capacity of MFI on financial performance in Tanzania iii. To examine the impact of saving mobilization and outreach of MFI on financial performance in Tanzania

The report applied descriptive research design to analyze the affiliation among the factors such as Quality of loan portfolio, institutional capacity and saving mobilization and outreach and financial performance at YETU Microfinance Bank Tanzania. The study applied purposive sampling method to pick the sample of 50 YETU Microfinance staff. Structured questionnaire that entailed close-ended, open-ended questions and the use of in-depth interviews were applied for gathering primary data. Which was explored through descriptive statistics by using frequency tables and regression equation for data analyzing.

The outcomes reveal that loan portfolio of microfinance had direct impacts on performance of microfinance. Findings revealed that the amount of the loan given to the customers which will impact the interest rates, the nature of the loans extended to customers, loan defaults rates, cost of loans and flexibility of the loans repayments to cause an effect of financial credibility of the microfinance which ends up impacting the financial performance of the microfinance. Studies by Millita (2012), Ngaruko (2012), Isaack (2019), Simon (2007), Andress (2010) and also, Welmon, (2008) had found to impacts this.

Also, the findings reveal that different factors related to microfinance institutions own characteristics had direct impacts on the performance of MFI’s. Several factors related to characteristics of microfinance in their performances which had been concluded to impacts the performance of microfinance includes the geographical coverage, Staff qualification, breath and outreach, organization size, managements of the microfinance and even the technology adopted by microfinance. These factors had been found to have impacts on the operations of microfinance on financial performances. These findings had also been mentioned by the finding in the study by Nyagone (2012), Lusanjara (2008), Luoh (2008), Ngonke, (2008), Mein (2009), Zhang (2005) and also Vijah (2012)

The study also finds other factors related to microfinance saving mobilization and outreach that had impacts on the performance of MFI’s in Tanzania. An analysis revealed these following factors to have influences on financial performances of microfinance level of saving and deposits to microfinance, Long term debt financing, number of active borrowers and also, Flexibility of the loan repayment schedule provided to the clients have disturbed the sustainability of the turnover of MFI’s.

6.2 Conclusion From these the results and corresponding discussion the researcher concludes that YETU Microfinance Bank has placed standard operating procedures and controls that guide the institution when accessing the quality of their loan portfolios, it has set standards that are maintained to manage the institutional capacity and has attracted a large target population which are the unbanked to generate saving and expand its outreach. The analysis of variables using simple linear regression analysis revealed the relationship between the variables and the financial performance of microfinance was a positive one.

From the findings, it is revealed that YETU Microfinance staffs are well aware and informed about the issues that can hinder the financial performance of their organization. The staff and management understand the impact on quality of loan portfolio can have on their bank. They management also values the strength a strong 55

institutional capacity has on the performance of the microfinance. The findings of the report also proved that YETU Microfinance bank aims at mobilizing savings from its clients and uncapping the unbanked and under banked population.

These three mentioned factors are the key reasons that affect the financial performances of microfinance and in each of the variable; there are other determinants variables. It is clear that the microfinance institutions should carefully and effectively consider these factors to improve their financial performances.

6.3 Policy Implications The study advocates that Microfinance institutions should regularly review their loan procedures and make them accessible. This is very important, as they will help in reducing the risk of loan default. Different ways can be done on reducing risk on loan managements such as the credit rating system to the applicants; this will help in limiting the possible loan amount that can be extended to the customer. Also, the microfinance should carefully consider the utilization of the loans applied, this is because most of the borrowers who had misused their loans get difficulties on repayments of the loans and hence increase the number of non-productive loans.

This report further recommends states factors such as the size of the loan given, interest rates, and even the usage of the loans need careful be considered by microfinances as they also had very impacts on the repayments of the loans. The microfinance institutions must ensure they are effectively monitoring and reviewing these and make improvements so as to ensure loans are being repaid timely. The study recommends loan application analysis be done carefully by the microfinance institutions so as to ensure that the applicants are eligible for the loans.

MFIs should work to strengthen internal systems and encourage membership growth and enhance the outreach program. MFIs should also increase the number of borrowers (breadth and outreach) and hence they will be apple to offer a high number of loans to the people. The effective ways of ensuring the performance of these loans is high must be used. They must be added by operative continuations to guarantee a superior

payment rate and attempt to function at a quite lower working cost for each borrower. Similarly, MFI’s must escalate the average loan size (depth of outreach) to be sustainable. Which means a larger than average size of the loan will increase financial sustainability, however it increases the level of risk in the case of default in repayments. Thus, MFIs should make more effort to thump to equalize the average loan size.

The study recommends the size and operations of the microfinance need to be reviewed and even enhanced so as to find the ways of raising finances such as operating the account where members can operate fixed accounts or current accounts as well as diversification of loan portfolio to include special categories, such as salary employees. Microfinance institutions must attempt to mobilize deposits from their clients and direct effective the mechanism to safeguard their clients’ deposits so as to enhance financial sustainability.

From the government perspective the implementation of strict of Laws and Regulations to control the microfinance institutions should stay into deliberations and be evaluated overtime to be in the entwined with market revolutions so as to upsurge their financial performance and reduce the risk to their customers mostly the ones with less access to banks who reside in rural areas which depend much on the operations of the microfinance institutions

The study also recommends the improvement of the financial arrangement by increasing different ways that can improve the financial position of the microfinance institution, these ways can be though the introductions of deposits though open of accounts or fixed accounts also diversification of loan portfolio to include special categories, such as salary employees.

6.4 Limitations of the study When carrying out the research a number of limitations where encountered .The major one being the Covid-19 pandemic that globally affected each nation’s economic and social activities. Attaining data from the respondents was challenging and took longer than expected because of the isolation policy and shifts that were imposed at YETU microfinance bank.

Also there are limited literatures on factors affecting financial performances of Microfinance Institutions in most of the developing countries.

6.4 Area for further research Because of the confines defined in this study. The study was restricted to some parts, which can be later researched for further studies. The areas recommended for further research are: i. This study was limited to one microfinance one branch that is YETU Microfinance Head Office but the study recommends the comparability studies between different branches. ii. As the results of this study reveal the operations of microfinance in country and town areas are different especially in relations of their performances the study recommends further study can be done considering microfinance in rural areas

REFERENCES

Chijoriga, M. M. (2000). The Performance and Sustainability of Micro Finance Institution in Tanzania. Working paper.

Kessy, S.A. & Urio, F. (2006). The Contribution of Microfinance Institution to Poverty Reduction in Tanzania. Research Report No.06.3-REPOA. Dar es Salaam: MKUKI na Nyota Publishers.

Ledgerwood, J. (1999). Microfinance hand book. Washington, D.C: World Bank

Mkwizu, E. (2004). Rural finance in Tanzania: a study of community banks in Kilimanjaro and Iringa; MBA thesis, university Dar es Salaam.

Mushi, D.R. (2004). An assessment of conflict between clients and management perception as a factor limiting sustainability of MFIs. MBA thesis, university of Dar es salaam.

Muturi, B.W (2000). Performances and sustainability of formal microfinance institutions (MFIs); a case study of Nairobi: MBA thesis, university of Dar es Salaam, department of accounting.

Randhawa, B. & Gallardo, M. (2003). Microfinance in Tanzania; Implications for Development and Performance of the Industry. African Region Working Paper Series No 5.

Rose, PC & Hudgins. SC. (2010). Bank Management & Financial Services (8th ed). New York: The McGraw Hill Companies.

Segnestam, P. N. and Arvidsson. (2002). Country Environment Analysis: A Review of International Experience. Stockholm Environment Institute, Draft, 2002.

Seibel, H.D. (2001). Rural finance for the poor: from unsustainable projects to sustainable institutions. IFAD rural finances working paper no.83285

APPENDICES QUESTIONNAIRE

ANALYSIS OF FACTORS AFFECTING FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTION IN TANZANIA: A CASE OF YETU MICROFINANCE BANK-Head Office Dar es salaam

Kindly circle or place a tick on the correct answer on the space provided.

Section I: Socio-Demographic Characteristics of Respondents

1. Gender of the respondent i. Male ( ) ii. Female ( )

2. Age of the respondent i. 25 – 30 years ( ) ii. 31 – 40 years ( ) iii. 41 – 50 years ( ) iv. 51 years and above ( )

3. For how long have you been working with the institution? i. 1 – 3 years ii. 4 – 10 years iii. 10 years and above

4. Education Level of the respondent i. Certificate ( ) ii. Diploma ( ) iii. Bachelor degree ( ) iv. Master’s degree ( )

Section II: Factors affecting financial Performances of Microfinance Institutions

Please specify your response by ticking (√) the appropriate statement, which is found to be correct. Whereby 1-Strongly agreed, 2-Agreed, 3-Neutral, 4-disagreed, 5- Strongly disagreed

1. Effect of the microfinance loan portfolios on the financial performance of this microfinance institution?

1 2 3 4 5 The loan amount (size) offered The loan delivery model used The nature of the loan offered Does loan default rates affect the financial performance The flexibility of loan repayment The cost per borrower

2. Effects of the institutional capacity on the financial performance of this MFI’s?

1 2 3 4 5 Is the geographical coverage reasonable Are the staffs qualified Doe the Size of the firm affects its financial performance Does the Breadth and outreach of microfinance cover a wider population Is the management of the microfinance running effectively The technology adopted Other? Please mention ______

3. 3. The effect of the saving mobilization and outreach on the financial performance of this MFI’s?

1 2 3 4 5 The level of savings Number of borrowers Long term debt financing The amount of non-repaid loans Other? Please mention

______

4.Any recommendations would you have in financial performance of your microfinance? ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ………………………………………………………………………………… ……………………