DETERMINANT OF LOAN PORTFOLIO QUALITY IN LARGE MICRO FINANCE INSTITUTION IN ETHIOPIA

Abstract

This study examined determinants of loan portfolios quality in large micro finance institution by using panel data of ten (10) MFIs from the period 2005- 2014. The study employed one dependent variables a s proxies for loan portfolios quality, namely: portfolio at risk over 90- days (PAR-90days) .This study was crucial from the fact that there is limited research on large MFIs loan portfolios quality using quantitative approach in Ethiopia. This Loan portfolio quality is measured by six independent explanatory variables there are institution size (LnTA), debt to equity (LEV), Deposit to loans (DTL), operating expense ratio (OPEX). Gross loan portfolio/ total asset (GLP/TA) and return on equity (ROE). Secondary data was used for ten large micro finance institutions which stayed in the industry more than ten years. Data used for this analysis is obtained from the annual financial reports of large MFIs, data from books, journals, newspapers, magazines, and reports of various governmental and nongovernmental organizations such as AEMFI (Association of Ethiopian Micro Finance Institutions). The correlation and multiple regression analysis was done with random effect model and EView 7 software used to regress the data based on Regression result. The findings of the study revealed that size, debt to equity, deposit to loan, Gross loan portfolio/ total asset and return on equity had positively significant impact on portfolio at risk over 90 day at different level of significance and The study finds insignificant results on only operating expense ratio Accordingly, the findings of the study may have implications for large MFIs and policy makers in that it provides hint on some important determinants of loan portfolios quality.