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Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia

Received: 8 January 2022     Accepted: 26 January 2022     Published: 16 February 2022
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Abstract

Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs operating in Ethiopia; the study selected 17 microfinance institutions which are operating in the period 2011 to 2018. The fixed effect model was used after running a Hausman test. ROA was used as a proxy for the financial performance measurement and the study used the internal and external factors. Based on the regression analysis, the internal variable like age of microfinance institutions was showed to be significant variables with positive relationship to ROA and other internal variables such as capital to asset ratio and debt to equity ratio were found to be statistically negatively significant. But operational efficiency, portfolio quality and size of microfinance institutions were found to have insignificant effect on ROA. On the other hand, the only external variable market concentration was insignificant factors of microfinance institution in the study period. Based on the regression outcome, the study concluded that the management of the microfinance institutions may develop sound mobilizing savings campaign strategy in order to collect adequate savings from depositors and mostly operate on membership contribution to enhance MFI’s capital for ensuring unexpected losses and also MFI managers should develop the efficiency of operations from year to year.

Published in Journal of Finance and Accounting (Volume 10, Issue 1)
DOI 10.11648/j.jfa.20221001.17
Page(s) 64-77
Creative Commons

This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.

Copyright

Copyright © The Author(s), 2022. Published by Science Publishing Group

Keywords

Microfinance Institutions, Financial Performance, ROA

References
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[5] Melkamu, T. (2012). Derteminants of Operation and Financial Self- Sufficiency: An Emprical Evidence of Ethiopian Microfinance Institutions.. MSc Thesis.
[6] Wellage, Nirosha, H. & Stuart, Z.. (2012). Ownership structure and Firm Financial Performance: Evidence From Panel Data in SriLanka. Journal of Business Systems, Governence and ethics Vol 7, No 1.
[7] Abebaw, Y. (2014). determinants of Financial Performance: MSc thesis on Selected Microfinance Institutions in Ethiopia. Jimama University, Ethiopia.
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[10] Sima, G. (2013). Determinants of Profitability: An Empirical Study on Ethiopian Microfinance institution, MSc thesis, Addis Ababa University, Addis Ababa Ethiopia.
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[17] Dechasa, S. C. (2018). Factors Affecting Profitability of Microfinance Institutions. Astudy on SNNPR States. alaita Sodo University, Ethiopia.
[18] Abummar, A. (2019). Factors affecting financial performace of oromia credit and saving share company. The case of eastern hararghe branch. Catalog of Economics and Finance.
[19] Ashebir, A. (2017). Determinants of Profitabilty: A study on Selected Microfinance Institution in Ethiopia.
[20] Wooldridge, J. (2006). Introductory Econometrics: amodern approach, 3rd Edition. South-western cengage learning.
[21] Brooks, C. (2008). Introductory ecnometrics forfinance, 2nd edition. New york: United states of America Cambridge University.
[22] Jorgensen, A. (2012). " The Pofitability of Microfinance Institution and the Connection of Yield on Gross Portfolio". Emprical Ananlysisi, Copenhagen Business School, Copenhagen.
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Cite This Article
  • APA Style

    Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. (2022). Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. Journal of Finance and Accounting, 10(1), 64-77. https://doi.org/10.11648/j.jfa.20221001.17

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    ACS Style

    Mulugeta Abuye Ertiro; Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J. Finance Account. 2022, 10(1), 64-77. doi: 10.11648/j.jfa.20221001.17

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    AMA Style

    Mulugeta Abuye Ertiro, Leyla Jemal Mohammed. Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia. J Finance Account. 2022;10(1):64-77. doi: 10.11648/j.jfa.20221001.17

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  • @article{10.11648/j.jfa.20221001.17,
      author = {Mulugeta Abuye Ertiro and Leyla Jemal Mohammed},
      title = {Factors Affecting the Financial Performance: A Case of Microfinance Institutions in Ethiopia},
      journal = {Journal of Finance and Accounting},
      volume = {10},
      number = {1},
      pages = {64-77},
      doi = {10.11648/j.jfa.20221001.17},
      url = {https://doi.org/10.11648/j.jfa.20221001.17},
      eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.jfa.20221001.17},
      abstract = {Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs operating in Ethiopia; the study selected 17 microfinance institutions which are operating in the period 2011 to 2018. The fixed effect model was used after running a Hausman test. ROA was used as a proxy for the financial performance measurement and the study used the internal and external factors. Based on the regression analysis, the internal variable like age of microfinance institutions was showed to be significant variables with positive relationship to ROA and other internal variables such as capital to asset ratio and debt to equity ratio were found to be statistically negatively significant. But operational efficiency, portfolio quality and size of microfinance institutions were found to have insignificant effect on ROA. On the other hand, the only external variable market concentration was insignificant factors of microfinance institution in the study period. Based on the regression outcome, the study concluded that the management of the microfinance institutions may develop sound mobilizing savings campaign strategy in order to collect adequate savings from depositors and mostly operate on membership contribution to enhance MFI’s capital for ensuring unexpected losses and also MFI managers should develop the efficiency of operations from year to year.},
     year = {2022}
    }
    

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    AU  - Mulugeta Abuye Ertiro
    AU  - Leyla Jemal Mohammed
    Y1  - 2022/02/16
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    T2  - Journal of Finance and Accounting
    JF  - Journal of Finance and Accounting
    JO  - Journal of Finance and Accounting
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    PB  - Science Publishing Group
    SN  - 2330-7323
    UR  - https://doi.org/10.11648/j.jfa.20221001.17
    AB  - Micro finance institutions in Ethiopia have shown a remarkable qualitative and quantitative growth since the early 1990s. It is increasingly understood that adequate financial services such as loans, saving products, insurance and payment services for the broad population, poor farmers and MSEs, promote quality and productivity. Thus, this study examined and presented the most prominent factors of financial performance of microfinance institutions in Ethiopia by using panel data. From a total population of 38 MFIs operating in Ethiopia; the study selected 17 microfinance institutions which are operating in the period 2011 to 2018. The fixed effect model was used after running a Hausman test. ROA was used as a proxy for the financial performance measurement and the study used the internal and external factors. Based on the regression analysis, the internal variable like age of microfinance institutions was showed to be significant variables with positive relationship to ROA and other internal variables such as capital to asset ratio and debt to equity ratio were found to be statistically negatively significant. But operational efficiency, portfolio quality and size of microfinance institutions were found to have insignificant effect on ROA. On the other hand, the only external variable market concentration was insignificant factors of microfinance institution in the study period. Based on the regression outcome, the study concluded that the management of the microfinance institutions may develop sound mobilizing savings campaign strategy in order to collect adequate savings from depositors and mostly operate on membership contribution to enhance MFI’s capital for ensuring unexpected losses and also MFI managers should develop the efficiency of operations from year to year.
    VL  - 10
    IS  - 1
    ER  - 

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Author Information
  • Department of Accounting and Finance, Wachemo University, Hossana, Ethiopia

  • Department of Accounting and Finance, Wachemo University, Hossana, Ethiopia

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