Determinants of Microfinance Institutions Loan Portfolios Quality: Empirical Evidence from Ethiopia

Abstract

This study examines determinants of loan portfolios quality, using panel data of 15 microfinance institutions from the period 2003 to 2009. The study employed three dependent variables as proxies for loan portfolios quality, namely:  provision for loan impairment (LLR), portfolio at risk over 30 – days (PAR-30days) and write –off ratio (WOR). This study is crucial from given that there is no research on MFIs loan portfolios quality using quantitative approach in Ethiopia. Based on pooled ordinary least squares (OLS) and random effects generalized least squares, the study finds an institution size ( LnTA) is negatively and significantly influences LLR and PAR- 30 days. Outstanding loan ratio has a significant positive impact on PAR-30 days and WOR. The ratio of women borrowers (WomBor) is significantly and negatively related to LLR and WOF. Change in total loan ratio has a significant negative (unexpected sign) impact on all of MFIs portfolios risk indicators: LLR, PAR-30days and WOR. Operating expense ratio is also positively related to WRO. The study finds no any significant sign between macroeconomic factors (changes in gross national income per capital and inflation) and MFIs portfolios risk indicators: LLR, PAR-30days and WOR. The findings of the study have implications for policymakers and microfinance institutions since MFIs provide financial services to poor households, they highly face default risk when borrowers fail to repay their obligations as per the agreement. So this study provides hint on some important determinants of MFIs loan portfolio quality.

DOI: 10.7176/EJBM/11-25-02

Publication date:September 30^th 2019