Determinants Of Credit Risk In Micro Finance Institutions: A Case Study Of Selected Ethiopian Micro Finance Institutions

Abstract

Microfinance institutions (MFIs) as the financial institution they are exposed to various financial risks given the ever dynamic and challenging business environment, the performance of most microfinance programs, has not been encouraging. Many have been plagued with problems as high default rates, inability to reach sufficient numbers of borrowers, and a seemingly unending dependence on subsidies. Therefore this study attempt to study determinants of credit risk of Ethiopian micro finance institution by using both firm specific and macroeconomic variable over the period 2005 to 2014 years. In order to achieve this objective, the study uses mixed research approach. Panel data covering ten year period from 2005 – 2014 are analyzed for thirteen microfinance institution Also in-depth interview was conducted with four chief industry regulators. The study analyses a range of determinants of nonperforming loan microfinance profitability, microfinance size, capital adequacy, loan growth, lending rate, operating inefficiency and inflation. The Fixed effects technique has been applied to find out the most significant variables from considered firm specific and macro economics variable. The regression results show that, loan growth, capital adequacy size of micro finance institution and microfinance profitability has significant effects on non performing loan of microfinance institution. On the other hand, leading rate, operating inefficiency and inflation don’t have statically significant effects on Ethiopian microfinance non performing loan. So, stakeholders should give consideration loan growth, capital adequacy ratio, microfinance profitability and volume of asset in controlling the level of nonperforming loan in Ethiopian microfinance Institution.