Determinants of Financial Sustainability of Ethiopian Microfinance Institutions

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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.



Ethiopian Microfinance Institutions, Financial Sustainability