Determinants of Financial Sustainability of Ethiopian Microfinance Institutions
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Date
2012-06
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A.A.U
Abstract
Microfinance promises to trim down poverty. To achieve this noble objective micro finance
institutions (MFIs) have to become steadily profitable because donor constancy is not a
given. Thus important question is: what factors drive the financial sustainability of MFIs?
Several studies have been conducted to determine the factors affecting financial
sustainability of micro finance institutions using large and well developed MFIs in various
countries. However, no such study has been conducted in Ethiopia where majority of MFIs
are small. This study followed a quantitative research approach using panel data
regression as the data analysis technique. The study was based on six years secondary
data obtained from 12 sampled MFIs in Ethiopia. We reported three important findings.
First, we show that a high quality credit portfolio, coupled with the application of
sufficiently high interest rates that allow a reasonable profit and sound management are
instrumental to the financial sustainability of MFIs. Second, we show that the percentage
of women among the clientele has a weak statistically non-significant negative effect on
financial sustainability of MFls. Third, we find that the client outreach of micro finance
programs and the age of MFIs have a positive but lesser impact on attainment of financial
sustainability. The policy implication is that MFIs have to emulate profit-making banking
practices by implementing a sound financial management and good managerial
governance to assure their financial sustainability.
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Keywords
Ethiopian Microfinance Institutions, Financial Sustainability