Determinants of Long-Term Sustainability and Efficiency of Ethiopian Microfinance Institutions

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Addis Ababa University


Excessive reliance on subsidies, coupled with uncertainties in the macroeconomic environment in which MFIs operate, has become an increasingly prominent issue in the world of microfinance. While earlier studies in Ethiopia, on MFIs’ performance, focused mostly on their internal characteristics, analysis of sustainability and efficiency have not been dealt sufficiently within the context of a joint analysis of funding structures, firm specific characteristics and macroeconomic environments. In an effort to fill this gap this study is made to independently identify the influence of funding sources, firm characteristics and macroeconomic variables on both sustainability and efficiency of MFIs in Ethiopia. It employs the most common indicators for microfinance sustainability and efficiency and introduces new evidence and possible explanations from an explicit perspective that might be relevant in the context of subsidies, deposit mobilization, scale of operation, gender, age and macroeconomic variables. It is found that increased dependence on donor funds erodes sustainability while maintaining higher percentage of deposits as a percent of loans, increased commercialization, helped MFIs to improve their sustainability. High proportion of women is also found to erode MFIs’ sustainability due to perceived reason of their small size of loans and high administrative costs. Consistent with theories and most empirical evidences, the experience of MFIs and GDP growth rate is revealed to enhance their sustainability. On the cost efficiency side having grants as a larger percent of assets significantly erodes MFIs’ efficiency in Ethiopia by increasing their cost per borrower. On the other hand larger loan size is found to decrease cost per borrower significantly .The study further revealed that, during the study period ,older Ethiopian MFIs were less efficient as a result of their failure to take advantage of (and lack of focus on) innovations, technology and economies of scale . The study recommends that, to realize financial sustainability and cost efficiency, MFIs should resort to commercialization of their operation rather than relying on grants and soft loans. They are required to maintain a higher level of deposits to loan ratio and a lower level of grants to asset ratio. Poorly performing and highly subsidized MFIs should give much regard for operational costs and subsidies and pay attention to any inefficiency in operations. Visa Vis their deposits level MFIs should also maintain a significant level of gross loan size to enhance efficiency by decreasing their cost per borrower. Key words: MFIs, sustainability, efficiency



MFIs, Sustainability, Efficiency