Abstract:
This study analyzed the determinants of financial performance of Micro Financial Institutions
(MFIs) in Ethiopia by using panel data of six MFIs operating in Ethiopia over the period 2003-
2020. In this study, the effects of both internal factors and external factors on the Return on
Assets of the MFIs were investigated. Specifically, the firms’ specific factors in this study were
the capital asset ratio, earning ability of the MFIs, liquidity, gearing ratio, size of the MFIs,
market concentration, portfolio at risk, and age of the MFIs; whereas the external factors
considered were Gross Domestic Product, and inflation rate. The study was made based on
secondary source of the data that was collected from National Bank of Ethiopia and the
Ethiopian Ministry of Finance and Economic Development. The investigation was considered
quantitative approach and fixed effect model was used in the study. The analysis was made by
descriptive statistic, Pearson Correlation Coefficient and Multiple Linear Regressions. Based on
the regression result, from the specific factors of the MFIs capital asset ratio, earning ability,
size of the firm and market concentration significantly related to financial performance of the
MFIs; whereas from external factors GDP of the country significantly related to ROA of the
MFIs over the period 2003-2020 operation. However, among the firms’ specific factors affecting
ROA of the MFIs capital asset ratio, earning ability of the MFIs, size of the MFIs, and market
concentration of the MFIs were significantly related to financial performance of the MFIs. Also,
from the external factors affecting return on assets of the MFIs, GDP was significantly related to
return on assets of the MFIs. Therefore, since the management of the MFIs has ability to control
the specific factors affecting financial performance of the MFIs, it is recommendable for the top level management of the institutions’ and its board of directors to give due attention to those
identified specific factors that significantly affecting performance of the MFIs to ensure their
long run funding requirement and sustain their key role in the MFIs. Also, the chief executive
body needs to follow and forecast the GDP level of the country to adjust their MFI functions
according to that change to be profitable.
