Factors Affecting Profitability of Microfinance Institutions (A Study of MFIs in Southern Nation Nationalities Peoples Regional State)

Abstract

This study examined internal and external factors affecting profitability of microfinance institutions of southern nations nationalities people’s regional state (SNNPRS) covering the period of 2009-2013. In doing so, the study adopted quantitative research method mainly focused on secondary document analysis and financial statement of the period, and the study used multiple linear Regression model, descriptive statistics and excel sheet for three MFIS data analysis to measure profitability; Return on Asset (ROA).Linear regression model was applied to investigate the impact of financing structure(FAS),Operating efficiency(OPE),size ,Age ,and Gross domestic product(GDP) on major MFI profitability. The outcome of the study shows that Financing structure and age of microfinance institutions has a positive and statistically significant effect on their profitability. However, Operating efficiency and, Size have a negative and statistically insignificant effect and, gross domestic product (GDP)had a Positive coefficient and was also statistically insignificant, implying that the improvement in economic condition measured in terms of GDP growth did not affect profitability of SNNPRS MFIs and additionally age of MFIs was used to check whether the learning effect can determine profitability of SNNPRS MFIs. The result showed a positive coefficient and statistical significant; indicating that the more MFIs become mature, the higher their profitability, so that as age going longer the profitability of SNNPRs MFIs will increase. The study suggested that management of microfinance institutions need to search available ways to reduce the operating costs and employ a good credit management policy. And also the study suggest that the management of MFIs should look for another funding source rather than depending on donation to measure their efficiency and stand by on their own feet. On top of this, the government needs to improve different facilities which enable microfinance institutions to be efficient and stable source of finance for the poor peoples of the region.

Keywords: Profitability, Microfinance institutions