Determinants of financial performance: a study on selected micro finance institutions in Ethiopia

Abstract

Microfinance promises to reduce poverty. To achieve this amazing objective Microfinance institutions have to become strong enough in financial performance because donor constancy is not a given. Thus the question is: In what extent the MFIspecific, industry-specific and macroeconomic factors determinants the Ethiopian micro finance industry financial performance from the period 2003-2011.By using OLS estimation method to measure the effect of internal and external determinants on financial performance in terms of return on asset. The study was based on a nine years secondary data obtained from AEMFI performance analysis report and MOFAD for thirteen (13) selected MFIs in Ethiopia. Beside this the study used primary data analysis to solicit mangers perception towards the determinants of financial performance of MFIs in Ethiopia. Regarding the explanatory variables, operational efficiency, GDP and size of MFIs affect MFIs financial performance significantly. The outcome of the study shows that Age of microfinance institutions has a positive but statistically insignificant effect on their financial performance. The other explanatory variables which is Portfolio at risk>30, Gearing ratio, capital to asset ratio and Market concentration affect negatively and not significant.The Ethiopian MFIs policy makers and managers should give high concern to the credit risk management, expense management and large MFIs size management and also the government and policy makers should work combining both poverty reduction and financial self- sufficiency of MFIs. And also MFIs have to emulate profit-making banking practices by implementing a sound financial management and good managerial governance to assure their financial performance and in the long run financial sustainability.