DETERMINANTS OF PROFITABILITY STUDY ON THE SELECTED MICROFINANCE IN ETHIOPIA

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.