FACTORS AFFECTING LENDING BEHAVIOR MICRO-FINANCE INSTITUTIONS: EVIDENCE FROM ETHIOPIAN MFIs

Abstract

The purpose of conducting the study was investigating factors affecting lending behavior of Ethiopian micro finance institutions. To do so, the researcher examined the effect of macroeconomic variables (Gross domestic product and interest rate) and firm specific variables (liquidity ratio, volume of deposits, operational efficiency and Asset size) as independent variables using total gross outstanding loan as dependent variable. The study adopted quantitative methods of research approach. There are thirty nine MFIs operating in Ethiopia. The target population comprised all of MFIs with greater than or equal to ten years financial data out of all micro finance institutions operating in Ethiopia. Out of purposively selected target population(twenty MFIs), twelve MFIs with ten years panel data (audited financial statement data of the period from 2011 to 2020) were randomly selected and used as sample size of the study. Collected panel data was organized, coded and fed into EViews(version-8) software where panel regression analysis, Pearson correlation analysis and testing of CLRM assumptions were conducted. According to Gujarati (2004), panel data estimators could be estimated using fixed effect or random effect regression models. To take either of them, the researcher conducted hausman test and the result showed that random effect is preferable model to this study. As a result, organized data of the study analyzed (using random effects regression model) and four(liquidity ratio, volume of deposit, operational efficiency and GDP) out of six variables were identified factors to have statistically significant effect on lending behavior of MFIs in Ethiopia.