“Determinants Of Credit Risk Of Micro Finance Institution In Ambo Town, Oromia Regional State, Ethiopia’’

Abstract

The purpose of the study was to examine the determinants of credit risk for MFIs in Ambo town. The research design employed in this study was Explanatory type with help of descriptive . The study employed both quantitative and qualitative research approaches in order to address the specific objectives formulated in this research. The type of data employed in this study was both primary and secondary data type with panel data of four MFIs from 2014 to 2023G.C. The sampling technique that the researcher employed was proportional sampling design to determine the true representatives of active customers of four MFIs in Ambo town. The mechanisms of data collections for borrower side variables was questionnaire and an interview-based survey were conducted to determine the determinants of credit risk for MFis in Ambo town and the secondary data types were gathered from Financial statement, consolidated audit reports of micro finance institutions found in Ambo town and academic studies was referred. The data collected from different sources was organized, edited , coded thoroughly , managed, analysed, and interpreted using SPSS software. The study employed, one dependent variable and eight independent variables, and of the eight independent variables used inthe study, five had a statistically significant effect on credit risks of MFIs, namely: profitability, liquidity, loan growth, managerial efficiency, and capital adequacy ratio, while firm size, inflation, and GDP had a statistically insignificant effect on the credit risk of MFIs. The R-square of the model was 77.8%, while the residual sum of squares of the model was 22.2%. Micro finance institutions (MFIs) to day are the largest financial institutions around the world. However, they are facing risks when they are operating. Credit risk is one of the most significant risks that micro finance institutions face. Therefore MFI managers should consider customer demographics (e.g., gender, marital status, education, loan purpose) when assessing credit risk, ensuring thorough follow-up and investigation. They must maintain adequate profit, liquidity, and capital adequacy ratios, improve managerial efficiency, and limit loan growth until customer feasibility is verified using the five Cs criteria. Additionally, MFIs should comply with National Bank of Ethiopia directives to maintain optimal liquidity levels and manage credit risk effectively.