THE DETERMINANTS OF FINANCIAL PERFORMANCE OF MICROFINANCE INSTITUTIONS IN ETHIOPIA: INTERNAL FACTOR ANALYSIS

Abstract

The study was carried out with the aim to ascertain the significant determinants of Ethiopian Microfinance Institutions‘ financial performance. The study followed a quantitative research approach using a balanced panel data set of 108 observations from 12 MFIs over the period 2003-2011. The Pooled OLS regression analysis was applied in order to get the results. The findings of the study indicate that most of the MFIs are highly leveraged. Further the result of the regression analysis shows capital(financing) structure and MFIs‘ size were found to have statistically significant impact on profitability(adjusted return on equity) and these can be taken as significant predictor variables in determining return on equity of the Ethiopian MFIs. However, portfolio quality, efficiency and productivity have insignificant impact on financial performance of MFIs in Ethiopia for the study periods. Based on the findings, the researcher recommends the concerned bodies to give due attention to enhance the size of MFIs as this positively affect the financial performance of institutions under study. Moreover, the MFIs have to be encouraged to work on deposit mobilization since it is considered as a cheap source of funds. The researcher also suggests further studies on the impact of subsidy and grants on financial sustainability; impact of age and type of ownership on financial performance of MFIs.