Determinants of Financial Performance of Microfinance Institutions in Ethiopia
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Date
2016-05
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Addis Ababa University
Abstract
Since MFIs work alongside government organizations and also have ties with larger global
organizations they provide a reliable source of financial support and assistance as compared
to other sources of financing. In addition, MFIs are considered as one of the policy
instruments to eradicate poverty. Therefore, in order to sustain their tremendous
contribution to the poorest society in the current dynamic macro-economic environment, they
have to periodically research and revisit the major determinants of their performance. Given
the above rational, the purpose of this study is to investigate the determinants of performance
of MFIs in Ethiopia over a period of twelve years (2003-2015) in the twenty-two selected
institutions. The paper employed seven microfinance indicators as independent variables:
portfolio at risk (PAR), loan loss reserve ratio (LLR), operating expense ratio (OER),
operational self-sufficiency (OSS), financial self-sufficiency (FSS), debt equity ratio (DER)
and logarithm of total assets (SIZE) in determining their effect on dependent variable
performance of microfinance institutions, return on assets (ROA). Quantitative research
approach based on unbalanced panel research design was used. The secondary data were
collected from the financial statement which was analyzed by using multiple regression
model. The results of the analysis showed that financial self-sufficiency and operational self-
sufficiency ratios have positive relationship with explanatory variable return on assets while
the remaining independent variables: portfolio at risk, loan loss reserve ratio, operating
expense ratio coverage ratio, debt-to-equity ratio and microfinance size, legalism of total
asset, have a negative effect on return on assets of MFIs. The analysis also revealed that all
the independent variables have significant effect on the performance of sampled MFIs except
debt to equity ratio and loan loss ratio ratios. The results further suggested that 46.5% and
55.1% of the variations on the dependent variable were caused by the independent variables
in the two models respectively. Based on the above findings, the study recommends that
MFI’s managements should focus on ensuring the financial and operational sustainability in
order to increase their performance. Moreover, they have to give due attention in managing
their PAR, OER and company size.
Keywords: Performance, return on asset,PAR, loan loss reserve, operating expense ratio,
operational self-sufficiency, financial self-sufficiency, debt-equity ratio & log of total assets
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Keywords
Performance, Return on asset, PAR, Loan loss reserve, Operating expense ratio, Operational self-sufficiency, Financial self-sufficiency, Debt-equity ratio & log of total assets