THE IMPACT OF LIQUIDITY ON PROFITABILITY OF MICRO FINANCE INSTITUTION IN ETHIOPIA

Abstract

Micro-Finance Institutions (MFIs) play a vital role in the financial system by providing financial services to those who cannot access from the conventional banking service in developing countries. Liquidity and profitability of businesses are imperative concern in the development and continued existence of a microfinance and the capability to hold the substitution involving the two immense importance’s for the management. The main objective of this study was to examine the impact of liquidity on microfinance institution profitability the case of 12 MFIs in Ethiopia. The research was used the explanatory research design, balanced fixed effect panel regression model and Views 8 econometric software was used for the data of 12 microfinance institutions in the sample covered the period from 2007 to 2016 from the total population of thirty four microfinance institutions operating in the country. The study was used the Return on asset as the proxy of profitability to measure financial healthiness of MFIs which was dependent variable of the study. The study finds that deposit loan ratio have significant negative impact on profitability of MFIs, whereas debt to equity ratio has negative influence on profitability of MFIs but statistically insignificant. Size and deposit asset ratio have positive and significant impact on profitability of MFIs in Ethiopia. Based on the findings, the study recommends that, microfinance institution management should pay greater attention to those significant variables in determining their optimal liquidity and optimize level of profitability of their micro finance institution of Ethiopia. Finally concluded that finding of the study indicates the liquidity has significant impact on profitability of microfinance institutions in Ethiopia. As a result the study recommends that microfinance should put strategies in place for monitoring, reporting and reviewing liquidity levels to ensure the long and short term stability of the entire system