Freetown, SIERRA LEONE – The year 2022 posed challenges for Deposit Taking Microfinance Institutions (DTMFIs), as profitability declined, non-performing loans (NPLs) increased, and regulatory compliance became a hurdle for some institutions, according to the Central Bank’s performance analysis of DTMFIs.
Despite the sector’s revenues exceeding operating costs by 14.6 per cent, two out of five DTMFIs failed to meet the 112 per cent Microfinance Information Exchange (MIX) requirement for Operational Self Sufficiency (OSS) due to high NPLs.
The recently published 2022 Financial Stability Report by the Bank of Sierra Leone (BSL) disclosed that an on-site examination of one DTMI was initiated in May 2023, with plans for a similar examination for another. The BSL anticipates that these institutions will successfully reduce their NPLs in 2023.
Overall, the profitability of DTMFIs declined in 2022, with the Return on Assets (ROA) dropping to 2.95 per cent from 3.65 per cent in 2021. This decrease was attributed to rising operating expenses and loan loss provisions. Although the consolidated ROA exceeded the minimum MIX requirement of 2.1 per cent, two out of five DTMFIs fell short due to high NPLs.
The Return on Equity (ROE) for DTMFIs declined to 13.3 per cent in 2022 from 17.7 per cent in 2021, slightly below the MiX benchmark of 13.6 per cent. Profitability was hindered by increasing NPLs and operating costs, even as paid-up capital increased by 23.74 per cent. Consequently, four out of five DTMFIs recorded an ROE below the MiX benchmark, as stated in the report.
While all DTMFIs maintained a satisfactory Portfolio-to-Assets (PTA) ratio, the PTA slightly declined to 53.7 per cent at the end of 2022 from 56.7 per cent the previous year. This indicates a modest reduction in the percentage of gross loans to total assets.
The report highlighted a significant increase in the Portfolio at Risk (PaR) ratio to 12.7 per cent in 2022 from 8.0 per cent in 2021, surpassing the MIX requirement of 4.8 per cent. None of the DTMFIs met the MIX standard, with three institutions exceeding the industry average.
BSL expects a decrease in PaR in 2023 as on-site examinations are conducted at institutions with PaRs above the industry average. Additionally, DTMFIs are urged to enhance their credit management practices and loan recovery strategies based on advice from the BSL. ZIJ/19/12/2023