DETERMINANTS OF FINANCIAL PERFORMANCE OF SELECTED MICRO FINANCE INSTITUTIONS IN ETHIOPIA

Abstract

Microfinance institution in Ethiopia is a fast-growing sector in the financial industry. This research, "Determinants of Performance of Microfinance Institution in Ethiopia," aims to identify factors influencing the performance of microfinance institutions (MFIs) in Ethiopia, specifically addressing the effect of firm-specific factors: capital adequacy, leverage, outreach, size, operating efficiency, credit risk and Macroeconomic factors (Inflation and GDP) on the financial performance of selected microfinance institutions. The study uses a quantitative research approach with an explanatory design to analyze data from 20 selected MFIs in Ethiopia for the period 2012 to 2022 with 220 observations, using entirely secondary data. Data is sourced from the National Bank of Ethiopia (NBE) and World Bank database for microfinance financial inclusion. Before the analysis is carried out secondary data is extracted and arranged with using excel spreadsheet. The finding from regression output revealed that leverage and capital adequacy affects ROA negatively and significantly whereas, operating efficiency and GDP growth rate affects ROA positively and significantly. Therefore, based on the finding the researcher concluded that both firm-specific and macroeconomic factors affect performance of MFIs during the study period and policy makers, directors and the government should consider the effect of the above factors for the financial health and wellbeing of the sectors.