DETERMINANTS OF PROFITABILITY OF MICRO FINANCE INSTITUTIONS IN ETHIOPIAN

Abstract

As noted by Muriu (2011), micro finance has attracted significant interest in recent years, both from policy makers and in the academia, hence this study examined the determinants of profitability of Ethiopian micro finance institutions using panel data of 19 micro finance institutions operating in the country over the period of 2004-2015. Since the collected data is secondary in nature, a quantitative approach to research was considered, besides the fixed effect model was used. Under this study both internal and external factors were included, the internal factors used in this study were, gearing ratio, capital adequacy, portfolio quality, efficiency, size and age where as the external factors were real GDP growth, inflation and market concentration. ROA was used as a proxy for profitability measure. Based on the regression result, among the micro finance institution specific variables, age was found to be significant variables with a positive coefficient against ROA whereas portfolio quality, gearing ratio, capital adequacy and operational efficiency (lower cost) were significant variables with a negative coefficient, the remaining one internal variables i.e. size was found to be statistically insignificant. More over the effect of external variables included in the study i.e. except inflation, GDP and market concentration were statistically insignificant. Based on the findings detected, the study suggested that management of micro finance institutions need to search available ways to reduce the operating costs and employ a good credit management policy. On top of this, the government needs to improve different facilities which enable micro finance institutions to be efficient and stable source of finance for the poor.