Future of Microfinance Institutions in Sri Lanka; Prediction of Financial Distress Using Altman’s Z-Score

Abstract

Microfinance is a valuable developing tool for alleviating poverty. Poverty remains to be one of the biggest policy concerns in Sri Lanka. Amongst various measures to eradicate it, Microfinance has provided a ray of hope. This paper presents a framework to predict the financial distress of such micro finance institutions operating in Sri Lanka using the Altman’s Z score model. Quantitative research approach was used based on secondary data from 2015 to 2019 on the sample population which comprised ten listed and unlisted microfinance institutions operating in Sri Lanka. This study applied the Altman Z score model on measuring financial health of selected microfinance institutions, where financial health is adopted as the dependent variable. Secondary data for the study were obtained through e-mail surveys at firm level, annual reports, and audited financial statements. The results of Z” Scores indicated that the mean financial health of the selected microfinance institutions has improved from 2015 to 2016, however there onwards it kept on deteriorating marginally. Thus, the microfinance institutions operating in Sri Lanka have a trend of downgrading their financial health moving closer to the Distress zone overtime. The distress prediction models used in this research, may not provide information as to what is wrong within the organization, but rather it will only give signals to identify the potential for financial distress which would encourage the firm to identify problems and take effective actions to minimize the incidence of failure.