Determinants of micro finance profitability: the case of selected micro finance institutions

Abstract

As noted by Muriu (2011), micro finance has attracted significant interest in recent years, both from policy makers and in the academia, hence this study examined the determinants of profitability of Ethiopian micro finance institutions using panel data of 12 micro finance institutions operating in the country over the period of 2003-2012. Since the collected data is secondary in nature, a quantilative approach to research was considered, besides the fixed effect model was used. Under this study both internal and external factors were included, the internal factors used in this study were, breadth of outreach, capital adequacy, portfolio quality, efficiency, size and age where as the external factors were real GDP growth and inflation. ROA was used as a proxy for profitability measure. Based on the regression result, among the micro finance institution specific variables, breadth of outreach and age were found to be significant variables with a positive coefficient against ROA whereas portfolio quality and operational efficiency (lower cost) were significant variables with a negative coefficient, The remaining two internal variables i. e. capital adequacy and size were found to be statistically insignificant. More over the effect of macroeconomic variables included in the study i.e. GDP and inflation were also statistically insignificant. Based on the findings detected, the study recommended measures that the micro finance institutions may need 10 take in order to improve their breadth of outreach, portfolio quality, operational efficiency and the role of the government in improving the performance of microfinance institutions in the country. KEY WORDS: Determinants of profitability, internal variables, external variables