| Abstract: | As the different literatures document shows the Financial Performance has significant
impact on both the firm performance and stockholder interests. Having this the main aim of
this study was to investigate and present the most prominent determinant of profitability of
microfinance institutions (MFIs) in Ethiopia by using panel data. Due to data limitation
out of a total population of 35 MFIs the study selected 19 micro finance institutions
operating in the country during the period of 2004-2016. The study used explanatory
research design based on the collected secondary data. Besides a quantitative approach,
the research considered the fixed effect model. ROA was used as a proxy for profitability
measurement. The study used internal and external factors. The internal factors which
were used in the study includes gearing ratio, capital adequacy, portfolio quality,
efficiency, size and age, while the external factors were real GDP growth, inflation and
market concentration. Based on the collected data regression analysis; the specific
variable age among the micro finance institutions was found to be significant variable with a positive coefficient against ROA. Whereas gearing ratio, capital adequacy and
operational efficiency were determined to be significant variable and size and quality of
portfolio became the insignificant variable with a negative coefficient. Moreover, the effect of the external variables Inflation was shown sound impact on ROA where us GDP was statistically insignificant. The industrial factor Market concentration found to have insignificant effect on ROA. Base on the study outcome the paper suggested that
management of micro finance institutions need to obtain available ways to reduce their
operating costs and employ a good credit management policy. |
