| Abstract: | This study aims to investigate the determinant factors affecting the profitability of Microfinance Institutions (MFIs), focusing on the case of Liyu Microfinance Institution S.C. Various factors can affect MFI profitability, potentially leading to significant losses in financial performance, both for the institution and the country's economy at large. Therefore, this study examines the impact of the Debt Ratio, Loan-to-Deposit Ratio, Non-Performing Loans, Inflation, and GDP Growth on MFI profitability. To achieve this objective, the study utilizes a quantitative approach, incorporating both descriptive and explanatory research designs. Secondary data spanning fifteen years, from 2008 to 2022, were collected from Liyu Microfinance Institution's audited financial reports, the National Bank of Ethiopia, and World Bank data. Descriptive statistics, including percentages and years, were used in the analysis, along with inferential statistics such as multiple regressions and correlation analysis. SPSS statistical software package version 26 was employed for data analysis. The study's results indicate that the Non-Performing Loan Ratio and GDP Growth have insignificant effects on Return on Assets (ROA), which is used to measure the company's financial performance or profitability. On the other hand, other determinant variables such as the Debt Ratio and Inflation Rate exhibit a significant negative impact on ROA. Interestingly, the Loan-to-Deposit Ratio demonstrates a significant positive effect on ROA.Based on these findings, the study recommends that Liyu MFI should balance its Loan-to-Deposit Ratio and ROA to achieve its desired level of liquidity and profitability. Additionally, the institution should review its current debt structure and explore options to optimize the debt ratio, such as debt refinancing or strategic debt reduction. These measures may prove instrumental in improving ROA and ensuring the long-term financial health of the organization. |
