Determinant factors affecting financial sustainability of microfinance institution in Ethiopia

The main purpose of microfinance fundamentally lies in offering those in the lowest income bracket a chance to become entrepreneur and be self-employed. Financial sustainability is the most significant type of sustainability as Micro Finance Institutions (MFIs) show different levels of sustainability. Although the literature has established substantial works explaining the determinant of financial viability of MFIs, the empirical research exploring this problem in Ethiopia is scarce. Consequently, this study aims to establish the factors affecting the financial sustainability of MFIs in Ethiopia. To accomplish this objective, a quantitative research approach and explanatory research design was adopted. An unbalanced panel data from all micro finance institutions of Ethiopia that have audited financial statements covering the years 2008-2023 is used for the study resulting in 16 years data for 40 micro finance institutions. This data was obtained from the National Bank of Ethiopia. Descriptive statistics, correlation analysis, and random effects multiple linear regression were used to analyze the data in line with the research objectives. The results from our study show that breadth of outreach, capital adequacy, size of MFI, leverage and age of the MFI were found to significantly affect the financial viability of MFIs in Ethiopia. On the other hand, the relationship between GDP and inflation and financial sustainability was insignificant. From these findings, the study suggests that Ethiopian MFIs should emphasize outreach, rebuilding capital adequacy, and raising the experience and size to guarantee the sustainability of MFIs.