Determinants of Financial Performance of Microfinance Institutions in Ethiopia

Abstract

Poverty is the major challenges faced by developing countries in pursuit of their social and economic development. Microfinances are established to provide opportunity mainly to rural poor to become financially self-sufficient and come out of poverty. Due to the very high contribution of MFIs in  poverty reduction and economic development in developing countries like Ethiopia exploring factors determining the financial performance of  these institutions is doubtless. The objective of this study is to identify the effect of firm specific, industry specific and macroeconomic factors  determining the financial performance of selected microfinance institutions in Ethiopia. In order to achieve the stated objective, quantitative    approaches and explanatory research design were employed. The study used financial ratios of eleven (11) purposively selected MFIs for a period of 12 years from 2003 to 2014 with a total of 132 observations. Return on asset and return on equity were used as measure of financial performance. Portfolio at risk, firm size, operating cost, portfolio to asset, capital adequacy, market concentration, gross domestic product and annual inflation rate were used as independent variables. Descriptive and random effects regression analysis was used to analyze the data. The result revealed that Loan portfolio, Portfolio at Risk, operating cost ratio, market concentration, GDP are the major determinants of financial performance. MFIs in Ethiopia are recommended to revise their credit procedures and policies to increase their repayment rates and the government has to intervene and support their operation so as to make them financially viable and strong to reduce poverty.

Keywords: Ethiopia, Determinants, Financial Performance, Microfinance Institution