Determinants Of Long-term Sustainability And Efficiency Of Ethiopian Microfinance Institutions

Excessive reliance on subsidies, coupled with uncertainties in the macroeconomic environmentrnin which MFIs operate, has become an increasingly prominent issue in the world ofrnmicrofinance. While earlier studies in Ethiopia, on MFIs’ performance, focused mostly on theirrninternal characteristics, analysis of sustainability and efficiency have not been dealt sufficientlyrnwithin the context of a joint analysis of funding structures, firm specific characteristics andrnmacroeconomic environments. In an effort to fill this gap this study is made to independentlyrnidentify the influence of funding sources, firm characteristics and macroeconomic variables onrnboth sustainability and efficiency of MFIs in Ethiopia. It employs the most common indicatorsrnfor microfinance sustainability and efficiency and introduces new evidence and possiblernexplanations from an explicit perspective that might be relevant in the context of subsidies,rndeposit mobilization, scale of operation, gender, age and macroeconomic variables.rnIt is found that increased dependence on donor funds erodes sustainability while maintainingrnhigher percentage of deposits as a percent of loans, increased commercialization, helped MFIsrnto improve their sustainability. High proportion of women is also found to erode MFIs’rnsustainability due to perceived reason of their small size of loans and high administrative costs.rnConsistent with theories and most empirical evidences, the experience of MFIs and GDP growthrnrate is revealed to enhance their sustainability.rnOn the cost efficiency side having grants as a larger percent of assets significantly erodes MFIs’rnefficiency in Ethiopia by increasing their cost per borrower. On the other hand larger loan sizernis found to decrease cost per borrower significantly .The study further revealed that, during thernstudy period ,older Ethiopian MFIs were less efficient as a result of their failure to takernadvantage of (and lack of focus on) innovations, technology and economies of scale .rnThe study recommends that, to realize financial sustainability and cost efficiency, MFIs shouldrnresort to commercialization of their operation rather than relying on grants and soft loans. Theyrnare required to maintain a higher level of deposits to loan ratio and a lower level of grants tornasset ratio. Poorly performing and highly subsidized MFIs should give much regard forrnoperational costs and subsidies and pay attention to any inefficiency in operations. Visa Vis theirrndeposits level MFIs should also maintain a significant level of gross loan size to enhancernefficiency by decreasing their cost per borrower.rnKey words: MFIs, sustainability, efficiency

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