Firm Innovation and Financial Performance of Tier IV Microfinance Institutions in Uganda

Abstract

Purpose: Tier IV MFIs have contributed enormously towards reducing the gap between the banked and the unbanked population in Uganda by extending affordable financial services largely to rural population. However, their financial performance in terms of Profitability, liquidity, loan portfolio and financial efficiency lives a lot to be desired. Consequently, this study was carried out to examine the effect of innovation on financial performance of Tier IV MFIs in Uganda Methodology: pragmatic paradigm guided many choices in regard to this study, especially on techniques to collect evidence on the reality under investigation. Relatedly both objective and subjective assumptions were key in selection questionnaire and interview guides as data collection techniques where Human Resource Managers, General Managers, Credit Managers, Internal Auditors and Accountants were the respondents for the quantitative study while 17 board chairmen participated in the qualitative interviews. The study used probability and non probability sampling techniques to select both the unit of analysis and the unit of inquiry. After collecting data from 139 microfinance institutions, Pearson correlation techniques were used to analyse the data. Findings: This study confirmed that innovation has a positive and statistically significant effect on financial performance of Tier IV MFIs in Uganda (r= .549, p<.01). This finding unveils that innovation (market innovation, process innovation and product or service innovation) has a potential to improve the financial health of Tier IV MFIs in Uganda. Recommendations: In consideration of this finding, we recommend that: 1) Tier IV MFIs make strategic investments in service innovation, process innovation and market innovation since it has been proven that these can improve their financial performance; 2) the government provides a conducive policy environment for Tier IV MFIs to thrive since their contribution to different financial spheres of the economy is enormous; 3) Tier IV MFIs managers minimise their overreliance on their unique internally developed resources or even on how they imbed their dynamic capabilities in their daily routines but focus more on developing new financial services, delivering satisfactory customer experience, improving financial transaction processes, creation of new markets and designing effective business models