Review of Public Administration and Management

Abstract

The Effect Of Liquidity On The Profitability Of Microfinance: Evidence From Microfinance Institutions in Ethiopia

Idris Ali Yimer*, Habtamu Kindu

Micro-finance institutions have a bold contribution to the day-to-day financial system by addressing different economical transactions to customers who cannot access the conventional banking service in developing as well in developed countries. The prominent objective of the paper was to examine the liquidity impact on the profitability of 12 microfinance institutions in Ethiopia specifically. Explanatory research design, balanced fixed effect panel regression model and E-views software were used for the data among 12 selected institutions that are currently operating in Ethiopia. Sample period covered from 2005 to 2014. Return on assets used as the proxy of profitability to evaluate the financial healthiness of MFIs. The study identified that the deposit loan ratio has a statistically significant negative impact on profitability, whereas the debt to equity ratio has a negative influence on the profitability of MFIs but statistically insignificant. The impact regarding size and deposit asset ratios was positive and significant on MFIs’ profitability of Ethiopia. Based on findings, the study recommended that microfinance institutions managing the body should give greater consideration to statistically significant variables to maintain an optimal level of liquidity and sustainable profit.

Published Date: 2025-05-14; Received Date: 2024-02-26