DETERMINANTS OF FINANCIAL SUSTAINABILITY OF MICROFINANCE INSTITUTIONS IN ETHIOPIA

Abstract

The purpose of this study was to empirically examine the Determinants of financial sustainability of MFI’s in Ethiopia. To achieve the intended purpose, this study employed the explanatory research design. Financial self-sufficiency was used as the performance measure. The study used nineteen microfinance institutions’ secondary sources of data over the period 2011-2020. Random effect model results were used and presented based on the test of fixed and random effect model after testing the Hausman tests which lead us to select random effect than after testing the Breusch-Pagan Lagrange multiplier (LM) test which indicated not to use simple ordinary least square (OLS). The classical linear regression model assumptions required to be fulfilled for OLS were also tested and the model was found fit for the purpose. The results found in the study revealed that operating expense ratio (OER) has a negative impact on the financial self-sufficiency while debt to equity ratio (DER), Portfolio Yield ratio (PYR), Capital to asset ratio (CAR), Liquidity ratio (LR), Net profit margin (NPM), Age, GDP growth rate and Inflation (INF) have a positive impact on the financial self-sufficiency on MFIs in Ethiopia. All variables, debt to equity ratio (DER) and operating expense ratio (OER), Portfolio Yield ratio (PYR), and Capital to asset ratio (CAR), have a significant impact on the financial self-sufficiency of MFIs whereas others have insignificant impacts on the financial self-sufficiency. Based on the findings, the study suggests that MFIs should utilize the opportunities of the macroeconomic environment by considering the impacts of macroeconomic factors during designing their strategic plan. Besides, MFIs have to attempt more to enhance their liability and they should develop a strategy that enables them to enhance deposit amounts through mobilizing funds by promoting saving behavior and enhancing credit purchases. the government and policymakers should give due attention to both poverty reduction and the financial sustainability of MFIs by enhancing the commercialization of their operation rather than relying on subsidies by promoting differentiated and diversified saving and loan products in addition to the existing products.