ASSESSMENT OF CREDIT RISK IN ETHIOPIAN MICRO FINANCE INSTITUTIONS

Abstract

Credit risk management is one of the most important activities in any company and cannot be overlooked by any economic enterprise engaged in credit irrespective of its business nature. Sound credit risk management is a prerequisite for a financial institutions stability and continuing profitability, while deteriorating credit quality is the most frequent cause of poor financial performance and condition. This study is based on quantitative research approach using panel data as the main data analysis technique. The study was based on a 9 years’ secondary data of 27 audited MFIs of Ethiopia obtained from the national bank of Ethiopia. This study specifies how the Ethiopian MFIs stand in terms of outreach, financial profitability, financial sustainability and efficiency. A financial ratio such as return on asset (ROA), return on equity (ROE), financial self-sufficiency (FSS), and operational self-sufficiency (OSS) was used. Moreover, descriptive statistics was used for the study to know how they are performing their operation. The result of the study shows that performances of MFIs are poor in terms of FSS which is below breakeven point implies that MFIs are subsidy dependent. Depth of outreach deviates from their mission as they are not reaching many poor people living under the poverty line. Regarding to ROA, the average value is less than standard which implied that the profitability is not encouraging. Therefore, their performance needs to be improved as they were not covering their financial breakeven to mean that some of the MFIs in Ethiopia cannot cover their operating expense, but are good in terms of breadth of outreach, efficiency, portfolio quality and ROE.