Determinants of Financial Sustainability of Microfinance Institutions in Ethiopia

Abstract

Microfinance promises to reduce poverty through the supply of loans, savings, money transfers, insurance and other financial services to those low-income and poor self-serving people. To achieve this objective sustainably, microfinance institutions are obliged to be financially sound, sustainable and capable from long term perspective. It is tried to identify different researches regarding the determinants for financial sustainability of MFIs. However, there are insufficient studies conducted in Ethiopia. Therefore, the purpose of this study was to empirically investigate the determinants of financial sustainability of MFIs in Ethiopia, where poverty is a serious problem. Financial self-sufficiency was used as financial sustainability measure, MFIs specific and macroeconomic factors as determinant variables. To achieve this purpose, the study employed quantitative research approach with explanatory research design. The study used 15 purposely selected MFIs‟ audited and balanced secondary data from NBE over the period 2011- 2018. The study used panel data fixed regression method to estimate the impact of explanatory variables on financial self-sufficiency, since fixed effect model is appropriate after the Hausman tests. The classical linear regression model assumptions required to be fulfilled for OLS were also tested and the model was found fit for the purpose. Regarding the explanatory variables, there are negative and significant impacts between Operating expense and financial sustainability of Ethiopian MFIs, whereas Portfolio yield, Net profit margin, capital adequacy and GDP have positive, statistically significant impacts on the financial sustainability of Ethiopian MFIs. However, leverage and inflation had a positive insignificant impact on financial sustainability. To conclude, the study found that MFIs in Ethiopia are not financially sustainable. Based on the findings, the study recommend that Ethiopian MFIs should increase their breadth of outreach with successful follow ups ,maximize their leverages to increase the loan and maintain sustainable finance and should take due attention on operating expenses that impacted financial sustainability negatively. Moreover, the impacts of macroeconomic variables should be considered while designing a strategic plan. On the other hand, since MFIs in Ethiopia are at early stage, the government and stakeholders should encourage the program by mobilizing funds to promote microfinance in remote areas to insure social impact