Portfolio quality is one of the determinant factors to rate the financial performance of a micro finance institution in Cameroon. Portfolio quality is a measure of how well or how best the institution is able to protect its portfolio against all forms of risks. The loan portfolio is by far the largest asset of a micro finance institution even though the quality of that asset and the risk it poses the institution can be quite difficult to measure. Portfolio quality is a critical area of performance analysis since the largest source of risk for any financial institution resides in its loan portfolio. For micro finance institutions with loans not backed by bankable collateral, the quality of the portfolio is absolutely crucial. Therefore, micro finance institutions must try to maintain their portfolios as much as possible. Other determinants of financial performance of micro finance institutions include
Capital Asset Ratio: This is a simple measure of solvency of micro finance institutions. The ratio helps a micro finance institution to assess its ability to meet its obligations and absorb unexpected losses. The determination of an acceptable capital to asset ratio level is generally based on a micro finance institution assessment of its expected losses as well as its financial strength and ability to absorb such losses. Micro finance institution with low capital ratios are riskier in comparison with better capitalized financial institutions.
Gearing Ratio/Debt to Equity Ratio: The debt to equity ratio is calculated by dividing total liability to total equity. Total debt includes everything the micro finance institution owes to others including deposits, borrowings, account payable and other liability accounts. The debt/equity ratio is the simplest and best-known measure of capital adequacy because it measures the overall leverage of the micro finance institution. The debt to equity ratio is a common method used to measure the extent to which a micro finance institution relies on debt as a source of financing.
Size of Micro Finance: The size of a micro finance institution has an impact on the financial performance of a micro finance institution. The size of a micro finance institution is measured by the value of its assets. The size of a micro finance institution is significantly positively linked to its financial performance. This variable is included to capture the economies or diseconomies of scale. Total assets of micro finance institutions are used as a proxy of size. Lack of economies of scale affect the profitability of a micro finance institution.
Operational Efficiency: The financial performance of a micro finance institution can also be measured by the degree of operational efficiency. This is illustrated in how well micro finance institutions streamline operations and take into account the cost of the input and/or the price of the output. Efficiency in expense management should ensure a more effective use of micro finance institution’s loanable resources which may enhance its profitability. Higher ratios of operating expenses to gross loan portfolio show a less efficient management. Operational efficiency in managing the operating expenses is another dimension for management quality. The performance of management is often expressed qualitatively through subjective evaluation of management systems, organizational discipline, control systems, quality of staff and others. In conclusion, operational efficiency and low administrative cost have an important bearing on the financial performance of a micro finance institution.
Market Concentration: Market concentration is the number, size and distribution of banks in a particular market or country. The market share of each bank is measured by the ratio of the bank’s total assets to the total assets of all banks.