Determinants of Financial Sustainability of Microfinance Institutions in Ethiopia

Abstract

Financial sustainability is crucial for the long-term viability and effectiveness of microfinance institutions in serving their target population and contributing to poverty alleviation efforts. It involves achieving a balance between generating enough revenue to sustain operations while also reaching out to a large number of low-income individuals who lack access to traditional financial services. The objective of this study is to examine the determinants that influence the financial and operational sustainability of selected MFIs in Ethiopia. In this study, an explanatory design with a quantitative approach was used, and the source of data was secondary data. The method of data collection for the internal variable was taken from the sample selected from ten MFIs official MX website, and for the external variable, it was collected from the central statistics agency. The method of data and analysis is a descriptive analysis and econometrics model, specifically applying a balanced data set of 150 observations from ten MFIs over the period 2009–2023. The major findings from the descriptive analysis of MFIs financial sustainability in terms of OSS were sustainable, but in terms of FSS, it was not sustainable. From econometric analysis, a random fixed effect result indicated that OSS and FSS are considered as proxy dependent variables, and independent variables loan, efficiency, deposit, clients, competition, and inflation were statistically significant and important variables that had an impact on OSS and FSS, but loan repayment and employee were not statistically significant variables. The findings of the study sampled MFIs that were financially unsustainable in terms of FSS. The result of this study recommended that it is better to focus on improving the financial sustainability of MFIs by implementing strategies to attract more deposits from clients by offering competitive interest rates and convenient deposit options.