Determinants Of Financial Performance Of Microfinance Institutions In Ethiopia

Since MFIs work alongside government organizations and also have ties with larger globalrnorganizations they provide a reliable source of financial support and assistance as comparedrnto other sources of financing. In addition, MFIs are considered as one of the policyrninstruments to eradicate poverty. Therefore, in order to sustain their tremendousrncontribution to the poorest society in the current dynamic macro-economic environment, theyrnhave to periodically research and revisit the major determinants of their performance. Givenrnthe above rational, the purpose of this study is to investigate the determinants of performancernof MFIs in Ethiopia over a period of twelve years (2003-2015) in the twenty-two selectedrninstitutions. The paper employed seven microfinance indicators as independent variables:rnportfolio at risk (PAR), loan loss reserve ratio (LLR), operating expense ratio (OER),rnoperational self-sufficiency (OSS), financial self-sufficiency (FSS), debt equity ratio (DER)rnand logarithm of total assets (SIZE) in determining their effect on dependent variablernperformance of microfinance institutions, return on assets (ROA). Quantitative researchrnapproach based on unbalanced panel research design was used. The secondary data wererncollected from the financial statement which was analyzed by using multiple regressionrnmodel. The results of the analysis showed that financial self-sufficiency and operational self-rnsufficiency ratios have positive relationship with explanatory variable return on assets whilernthe remaining independent variables: portfolio at risk, loan loss reserve ratio, operatingrnexpense ratio coverage ratio, debt-to-equity ratio and microfinance size, legalism of totalrnasset, have a negative effect on return on assets of MFIs. The analysis also revealed that allrnthe independent variables have significant effect on the performance of sampled MFIs exceptrndebt to equity ratio and loan loss ratio ratios. The results further suggested that 46.5% andrn55.1% of the variations on the dependent variable were caused by the independent variablesrnin the two models respectively. Based on the above findings, the study recommends thatrnMFI’s managements should focus on ensuring the financial and operational sustainability inrnorder to increase their performance. Moreover, they have to give due attention in managingrntheir PAR, OER and company size.rnKeywords: Performance, return on asset,PAR, loan loss reserve, operating expense ratio,rnoperational self-sufficiency, financial self-sufficiency, debt-equity ratio & log of total assets

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