DETREMNENTS OF OPERATIONAL AND FINANCIAL SUSTAINABILITY OF THE MICRO FINANCE INSTITUTIONS (MFIs) in ETHIOPIA

Abstract

Poverty reduction and possible eradication is at the forefront of the development strategy of Ethiopia. Interventions through the delivery of microfinance services are considered as one of the policy instruments to eradicate poverty. The microfinance paradigms focus on reduction of poverty through improving access to finance and financial services to the poor. However, for sustainable poverty alleviation, the MFIs themselves should be operationally and financially sustainable. Given the relation between the well-being of the microfinance sector and the goal of poverty eradication, the purpose of this paper is to empirically investigate the determinants of operational and financial sustainability of microfinance institutions in Ethiopia where poverty is a serious problem. The study followed a quantitative research approach using a balanced panel data set of 110 observations from 10 MFIs over the period 2001-2012, excluding 2010 for which the researcher was unable to acquire data. The Study considers FSS and OSS as a proxy by taking more explanatory financial variables, Outreach and macroeconomic variables. Hence, this work is comprehensive on the determining factors for the sustainability of Ethiopian MFIs, by using proxies’ financial self sufficiency and operational self-sufficiency. Therefore, it will help to unveil what was probably not unveiled in previous studies. The regression results reveal that macroeconomic variable Inflation rate and cost per borrower each affected MFIs’ financial sustainability negatively and significantly. On the other hand, yield on gross loan portfolio and size of MFI positively affect sustainability and are significant. Deposit Mobilization, operating expense ratio and portfolio at risk are not statistically found to affect MFIs’ financial selfsufficiency in Ethiopia. The econometric analysis also indicates that number of borrowers and average loan size per borrower positively and significantly affect the operational sustainability of MFIs in Ethiopia. For this particular study, debt to equity ratio and cost per borrower are found to be strongly and negatively affect the operational self-sufficiency of MFIs. On the other hand, the variables return on equity, loan per loan officer and percentage of female borrowers of MFIs are insignificant. Lastly this study found that MFIs in Ethiopia are operationally self-sufficient while they are not financially self-sufficient.