Analyzing the determinants of financial performance of micro financial companies : a case study

Abstract

Purpose: The purpose of this study is to investigate the determinants of microfinance institutions’ profitability in Ethiopia over a period of nine years (2010-2018) in twelve purposively selected institutions. Design/Methodology/Approach: Microfinance institutions are proved to be a powerful tool for financial inclusion through financing entrepreneurial activities in rural and urban areas. However, to reach at their objectives, microfinance institutions need to be financially sustainable and sustainability largely depends on profitability. The study investigated eight microfinance institutions profitability indicators including debt equity ratio, liquidity ratio, operational self-sufficiency ratio, financial self-sufficiency ratio, portfolio at risk, loan loss reserve ratio, operating expense ratio and total assets (size). Profitability of microfinance institutions is measured by return on asset. Quantitative research approach was employed and secondary data were collected from the audited financial statements which were analyzed using multiple regression model. Findings: The results of the study show that operational self-sufficiency ratio, financial self-sufficiency ratio and total assets have positive significant relationship with return on assets of microfinance institutions whereas operating expense ratio, debt-to-equity ratio and liquidity ratio have negative significant effects on return on assets of microfinance institutions. However, portfolio at risk ratio and loan loss ratio has no significant effect on the profitability of microfinance institutions. Practical implications: The study recommends that microfinance institutions management shall focuses on ensuring the operational self-sufficiency, financial self-sufficiency and total assets (size) in order to increase their profitability. Moreover, due attention shall be given to well managing their operating expense ratio, debt equity ratio and liquidity ratio.