DETERMINANTS OF FINANCIAL SUSTAINABILITY OF MFIs IN ETHIOPIA

Abstract

Microfinance is a type of banking service that is provided to unemployed or low-income individuals or groups who have no alternative source to gain financial support. Ultimately, the goal of microfinance is to give low income peoples an opportunity to become self-sufficient for their entrepreneurship development. It is observed that microfinance organizations have had various degrees of sustainability of which financial sustainability is the major one. It is tried to identify by different researchers regarding the determinant factors that affect financial sustainability of MFIs. However, there are insufficient studies conducted on this area in Ethiopia. Therefore this study was conducted to find out the factors which affect the financial sustainability of MFIs in Ethiopia. The study is based on quantitative research approach with explanatory research design using panel data fixed regression as the main data analysis technique and it is based on a 11 years secondary data i.e. from 2014 to 2014 obtained from the performance analysis report of AEMFI and other sources for 15 selected MFIs in Ethiopia. The samples have been selected purposefully by considering the size of an institution’s loan portfolio. The study found that MFIs in Ethiopia are not financially sustainable and identified breadth of outreach and deposit to loan ration affect the financial sustainability of MFIs in Ethiopia significantly on the other hand, inflation and operating expense ratio are significant and negative relationship with financial sustainable of MFIs in Ethiopia. Thus, the study recommend, that Ethiopian MFIs should increase their breadth of outreach and deposit to loan as to maintain sustainable financial performance and take due attention on operating expense ratio that significant negative effect up on financial sustainability. On the other hand, since MFIs in Ethiopia is in infant stage, the government should avail different facilities or infrastructures to reduce inefficiencies.