Determinants of Financial Profitability of Microfinance Institutions in Ethiopia

Abstract

Microfinance is a term often applied in reference to small-scale financial services primarily credit, savings and insurance. It is a tool that has been acceptable over time to offer poor people access to basic financial services, such as loans, savings, money transfer services and micro insurance. The rapid changes in the business environment have led to the increase in resource productivity and decrease in non-performing assets. However, the profitability has come under pressure because of changing environmental requirement of safe care of money. This study attempted to investigate the factors that determine the financial performance of MFIs in Ethiopia. The study followed a quantitative research approach using a balanced panel data set of 39 observations from 13 MFIs over the period 2004, 2006 and 2008. From the findings, outreach, borrowing, capital asset ratio, equity and percentage of female borrowers were important variables in determining financial profitability of Microfinance institutions in Ethiopia. Thus, interventions must be undertaken by promote and support women’s in accessing credit, increase number of borrowers, increase the total as well as average loan size and in general should ensure their profitability growth to go in line with their objectives to make their initial mission sustain, serving the interest of small groups of people.

Keywords: Financial profitability, microfinance institutions, outreach