The Determinants of Profitability (Evidence from MFIs in Addis Ababa)

Abstract

The role of MFIs in the development process of a nation is remarkable. Micro finance has fascinated noteworthy attentiveness in recent years, both from policy makers and in the academia. The main objective of this study was to examine the determinants of profitability using mixed research approach and explanatory research design. Besides, the study used multivariate regression analysis and relied on statistical techniques aided by panel data analysis for the problem under study. The study found that number of borrowers, capital to asset ratio operational efficiency and GDP are positively and significantly affects profitability at 1%. Moreover, quality of portfolio and age are positively and significantly affects MFIs profitability at 5%. However, inflation negatively and significantly affects profitability MFIs at 1%. MFIs have to advance their service quality by expanding their operation to meet the needs of unbanked society and to increase a number of women clients. So, the management of MFIs needs to improve the idle resource management and focus on their internal factors such as capital adequacy, credit risk provisioning and efficiency in the management of operating expenses. In addition, additional policy support is needed such as financial provision, market information and training, to enhance the development of economic growth and the different areas where difficulties are being faced on the way to provide microfinance services.