Determinants of Financial Distress: The Case of Microfinance Institutions in Ethiopia

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Addis Ababa University


Micro-Finance Institutions (MFIs) play a vital role in the financial system by providing financial services to those who cannot access from the conventional banking service in developing countries. The main objective of this study was to examine the determinants of financial distress in the case of selected MFIs in Ethiopia. Balanced fixed effect panel regression was used for the data of ten microfinance institutions in the sample covered the period from 2006 to 2015 from the total population of thirty five microfinance institutions operating in the country . The study used the Altman’s Z score of the MFIs as the proxy of financial distress to measure financial healthiness of MFIs. The study finds that capital adequacy, earning ability, liquidity and microfinance institutions age have significant negative impact on financial distress of MFIs, where as portfolio at risk greater than 30 days has significant positive influence on financial distress of MFIs. Operational efficiency of MFIs which is measured by operating expense to gross loan portfolio has negative influence on financial health of MFIs but statstically insignificant. Macro economic factors GDP and inflation have no significant influence on financial distress of MFIs in Ethiopia. Based on the findings, the study recommends that PAR>30 days which is found to negatively influencing the financial health of the MFIs need to be closely watched and taken care of. Thus, the managements of MFIs ensure strict adherence to regular loan monitoring and also credit policies of MFIs must be regularly updated. Moreover, managements of MFIs should give great emphasis in properly managing capital to asset ratio. Regulators and policy makers also need to set the minimum capital adequacy requirements for MFIs because well capitalized MFIs are more flexible in dealing with problems arising from unexpected losses. Keywords: Financial Distress, MFIs, Altman’s Z score



Financial distress, MFIs, Altman’s Z score