DETERMINANTS OF FINANCIAL SUSTAINABILITY OF MFIs IN ETHIOPIA

Abstract

Microfinance is a type of banking service that is provided to unemployed or low-income individuals or groups who have no alternative source to gain financial support. Ultimately, the goal of microfinance is to give low income peoples an opportunity to become self-sufficient for their entrepreneurship development. It is observed that microfinance organizations have had various degrees of sustainability of which financial sustainability is the major one. It is tried to identify by different researchers regarding the determinant factors that affect financial sustainability of MFIs. However, there are insufficient studies conducted on this area in Ethiopia. Therefore this study was conducted to find out the factors which affect the financial sustainability of MFIs in Ethiopia. The study is based on quantitative research approach with longitudinal research design using panel data fixed regression as the main data analysis technique and it is based on a 10 years secondary data obtained from the annual bulletin of AEMFI and mix-market database for 15 selected MFIs in Ethiopia. The sample size has been judged based on the availability and quality of data and the resulting estimates. The study found that MFIs in Ethiopia are not financially self-sufficient and identified breadth of outreach and deposit to loan ration affect the financial self-sufficiency and sustainability of MFIs in Ethiopia significantly on the other hand, inflation and operating expense ratio are significant and negative relationship with financial self-sufficiency of MFIs in Ethiopia. Thus, the study recommend, that Ethiopian MFIs should increase their breadth of outreach and deposit to loan so as to maintain sustainable financial performance and take due attention on operating expense ratio that significant negative effect up on financial sustainability. On the other hand, the government should adjust regulatory frameworks to permit the microfinance institutions to offer lending services to a wide range of poor people and give sustainable training and capacity building program to the MFIs.