International Journal of Finance and Commerce

International Journal of Finance and Commerce

Online ISSN: 2664-715X
Print ISSN: 2664-7141

International Journal of Finance and Commerce
Online and Print Journal   |   Indexed Journal   |   Refereed Journal   |   Peer Reviewed Journal
International Journal of Finance and Commerce
2019, Vol. 1, Issue 1
Determinants of financial performance of micro finance institutions in Ethiopia

Endalachew Bekalu, Damot Alehegne, Abatneh Mengist

One of the major challenges faced by developing countries in pursuit of their social and economic development is poverty. The primary objective of microfinance is to provide an opportunity to financially deprived people 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 objectives 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. The study used return on asset and return on equity as dependent variables of financial performance measure. 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. For data analysis the study used descriptive analysis, correlation analysis and a random effects regression model. The result of random effect regression revealed that capital adequacy ratio and Loan portfolio to asset ratio has positive effect on financial performance of MFIs in Ethiopia. Whereas Portfolio at Risk, firm size, operating cost ratio, market concentration, GDP and inflation has negative impact on financial performance of Ethiopian MFIs. Portfolio quality and market concentration found to have a significant negative effect on financial performance whereas loan portfolio has significant positive effect. 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.
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