Determinants of operational and financial sustainability of microfinance institution in Ethiopia
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Date
2024-06-25
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A.A.U
Abstract
In Ethiopia, where access to financial services is limited, microfinance institutions (MFIs) play a crucial role in poverty reduction. However, achieving financial and operational sustainability remains a persistent challenge for these institutions. This study aims to identify and analyze the determinants influencing the operational and financial sustainability of MFIs in Ethiopia. Employing a quantitative research approach and an explanatory research design, secondary data from the annual bulletin of AEMFI and mix market database were utilized for 10 years on 14 selected MFIs. The random effect regression model was chosen based on Hausman specification and Breush Pagan's LM tests, revealing its suitability for both operational self sufficiency (OSS) and financial self sufficiency (FSS) models. The analysis of the OSS model identified debt equity ratio, operating expense ratio (OER), depth of outreach (lndepth) and percentage of female borrowers (pfemb) as significant variables at 5%. Similarly, the FSS model indicated debt equity ratio (DER), depth of outreach (lndepth), return on equity (ROE), and breadth of outreach (lnbreadth) as significant determinants. Consequently, MFIs are recommended to consider these factors DER, OER, pfemb, lndepth, lnbreadth, and ROE in their decision making processes to enhance operational and financial self sufficiency, thereby contributing to sustainable poverty reduction efforts in Ethiopia.