Determinants of Microfinance Institutions Loan Portfolios Quality: Empirical Evidence from Ethiopia
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Date
2014-05
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Addis Ababa University
Abstract
This s tudy e xamined d eterminants of l oan por tfolios qual ity, us ing pane l dat a of fourteen (14)
MFIs from the period 2003- 2012. The study employed four dependent variables as proxies for
loan por tfolios qual ity, nam ely: l oan l oss r ate (LLR), por tfolio at r isk o ver 3 0-days ( PAR-
30days), por tfolio at r isk ov er 90 -days ( PAR-90days) and write-off r atio (WO R).This st udy i s
crucial f rom t he fact t hat t here i s l imited r esearch on M FIs l oan por tfolios qual ity us ing
quantitative appr oach i n E thiopia. Based on t he pool ed o rdinary l east squares (OLS) and
random effects generalized least squares, the study finds an i nstitution size (LnTA) is negatively
and s ignificantly i nfluences L LR and W OR. O perating e xpense (OPPEXP) has a ne gative
significant r elationship with L LR, P AR-30days and W OR. A ge of t he M FIs ha s a pos itive
significant r elationship with P AR-90days. P ercentage of women bor rowers (WOMBOR) has a
positive s ignificant i mpact on P AR-30days. D eposit t o l oans (DTL) pos itively and s ignificantly
influences LLR and WOR. Gross loan portfolio/ total asset (GLP/TA) has a negative significant
impact on L LR and W OR. V oluntary s avings ( LnVOLSAV) has a ne gative s ignificant
relationship with LLR, PAR-90days and W OR. The regression results also show that Return on
equity ( ROE) has a ne gative s ignificant r elationship with L LR, P AR-30days, P AR-90days and
WOR. Change in growth national income (CH-GNI) negatively and significantly influences PAR-
30days and P AR-90days. The s tudy finds i nsignificant r esults on l everage and i nflation. Si nce
MFIs pr ovide f inancial s ervices t o t he poor pe ople t hose who c annot pr ovide c ollateral, t hus
they m ay hi ghly f ace de fault r isk when bo rrowers f ail t o r epay t heir obl igations a s pe r t he
agreement. A ccordingly, t he f indings of t he s tudy may ha ve i mplications f or M FIs and pol icy
makers in that it provides hint on some important determinants of loan portfolios quality
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Keywords
Empirical evidence, Quality, Loan Portfolios