Financial Analysis of Microfinance Institutions in Rwanda, a Framework for Performance Evaluation, 2006-2010

Abstract

The study deals with financial analysis of microfinance institutions in Rwanda as a framework for Performance Evaluation. The study reveals that there has been anarchical creation of microfinance institutions between 2003 and 2005 in Rwanda. This generated worries at all levels because of the noncompliance with regulations into force by MFIs, given that they started to operate without prior authorization by the monetary authority; Central Bank of Rwanda. At the beginning of the year 2006, a number of MFIs collapsed due to poor corporate governance, unprofessional hostile competition and poor internal organization that led to undiscovered mismanagement and loss of confidence.

In a quest to regulate the industry and also to react to the crisis, the Central Bank and the Ministry of Finance and Economic Planning concerned to open up a planned frame of national policy and strategy as regard to microfinance. The national microfinance policy was adopted by the Government in 2006 and the strategy of its implementation, and thereafter, the National Bank of Rwanda drafted a specific Law establishing the organization of microfinance activities and its implementing regulation.

The study goes on analysing the financial statements of microfinance institutions, over five years from 2006 to 2010, using various techniques and tries to establish the relationship between financial management systems and performance. The characteristics examined include the following; vertical and horizontal analysis, key ratios mainly loan portfolio quality ratios, solvency and liquidity ratios, efficiency and productivity ratios, sustainability ratios, and scale and depth of outreach.

The study consisted in an analysis, over five years from 2006 to 2010, of financial data from COOPEDU in parallel with MFIs members of Association of Microfinance Institutions of Rwanda (AMIR). The results put forward that the industry is slowly by slowly recovering after the 2006 crisis. Financial performance indicators show that the MFI sector has achieved tremendous growth towards sustainability.

Efficient legal framework including close, thorough and regular review of MFIs systems by regulators and monitoring skills of those MFIs could enable the sector to find sustainable solutions to the problems it faces.