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WOLAITA SODO UNIVERSITY
SCHOOL OF GRADUATE STUDIES

DETERMINANTS OF FINANCEIAL PERFORMANCE OF MICROFINANCE INSTITUTION IN ETHIOPIA(A CASE STUDY OF DAMOTA BRANCH OMO MICROFINANACE INSTITUTION IN WOLAITA SODO CITY).

M.SC. THESIS
BY
BERHANU WAJA WAREBO

COLLEGE: BUSINESS AND ECONOMICS
DEPARTMENT:ACCOUNTING & FINANCE
PROGRAM: ACCOUNTING & FINANCING

MAJOR ADVISOR: Dr. Durga Rao
April 25/ 2018
WolaitaSodo,Ethiopia

Determinants of Financial Performance of Microfinance Institutions in Ethiopia (A Case Study of Damota Branch Omo Microfinance Institution in WolaitaSodo City).

WOLAITA SODO UNIVERSITY
SCHOOL OF GRADUATE STUDIES
DEPARTMENT OF ACCOUNTING AND FINANCE
Msc Approval Sheet
The thesis entitled, “Determinants of Financial Performance of Microfinance institution in Ethiopia (A Case Study of Damota Branch Omo Microfinance Institution in WolaitaSodo City)” was carried out by Mr. BerhanuWaja under the supervision of Dr. Durga Rao and this title has been approved by concerned bodies of WolaitaSodo University for the partial fulfillment of the requirements for the degree of masters of science in Accounting and Finance (Msc).

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SCHOOL OF GRADUATE STUDIES
WOLAITA SODO UNIVERSITY
As thesis advisor, I hereby certify that I have read and evaluated this Thesis prepared under my guidance by Mr. BerhanuWajaWarebo entitled “Determinants of Financial Performance of Microfinance Institution” Case Study of Damota Branch Omo Microfinance Instituton. I recommend that it be submitted as fulfilling the thesis requirement.

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As members of the Board of Examiners of the M.Sc. thesis open defense examination, we certify that we have read and evaluated the thesis prepared by Mr. BerhanuWajaWarebo and examined the candidate. We recommend that the thesis be accepted as fulfilling the thesis requirements for the degree of Masters of Scienceof Accounting & Finance in Regular.

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Dedication

I dedicate this thesis to my father WajaWarebo and my mother Shitaye Fanta, for nursing me with affection and love and for their dedicated partnership in the success of my life and my elder sister ZewudituWaja if Jesus allow her live safe in life b/c she has been struggling with serious problem during my study time, not by forgetting a lot of my sisters and brothers.

STATEMENT OF THE AUTHOR
By my signature below, I declare and affirm that this thesis is my own work. I have followed all ethical principles of scholarship in the preparation, data collection, data analysis and completion of this thesis. All scholarly matter that is included in the thesis has been given recognition through citation. I affirm that I have cited and referenced all sources used in this document. Every serious effort has been made to avoid any plagiarism in the preparation of this thesis.

This thesis is submitted in partial fulfillment of the requirement for a degree from the School of Graduate Studies at WolaitaSodo University. The thesis is deposited in WolaitaSodoUniversity Library and is made available to borrowers under the rules of the library. I solemnly declare that this thesis has not been submitted to any other institution anywhere for the award of any academic degree, diploma or certificate.

Name: Signature: _______________ Date:

School/Department:

Table of Contents
Acknowledgement VIII
List of Tables IX
List of Figures XII
List of Acronyms XIII
Abstract XIV
CHAPTER ONE 1
1. Introduction 1
1.1. Background of the Study 1
1.2. Statement of the problem 2
1.3. Objectives of the Study 4
1.3.1. General Objectives of the Study 4
1.3.2. Specific Objectives of the Study 4
1.4. Significance of the Study 5
1.5. Scope of the study 5
1.6. Limitation of the Study 6
1.7. Research Hypothesis 6
1.8. Structure of the Study 7
CHAPTER TWO 8
2. LITERATURE REVIEW 8
2.1. Theoretical framework 8
2.1.1. History of Microfinance Institution in Ethiopia 9
2.1.2. Performance measurement in Microfinance Institutions 9
2.1.3. Sustainability of Microfinance 12
2.1.3.1. Financial Sustainability 13
2.1.3.2. Conceptual Framework 16
2.2. Empirical Framework of Research 16
2.2.1. Determinants of Financial performance of MFIs 16
2.2.1.1. Portfolio Quality 17
2.2.1.2. Capital Asset Ratio 18
2.2.1.3. Gearing Ratio/Debt to Equity Ratio 19
2.2.1.4. Size of Microfinance (Total Asset) of microfinance institution 20
2.2.1.5. Operational or costs Efficiency 20
2.2.1.5.1. Capital Structure and Performance of Microfinance Institutions 21
2.2.1.5.2. Capital Adequacy and Performance of Microfinance Institutions 22
2.2.1.5.3. Number of Borrowers and Performance of Microfinance Institutions 23
2.2.1.5.5. Operational Efficiency, productivity and financial performance of microfinance institutions 23
2.2.1.5.6. Age of Microfinance institution 24
2.3. Active clients per staff members 24
2.3.1. Portfolio to assets 24
2.3.2. Market Concentration 25
CHAPTER THREE 28
3. RESEARCH METHODOLOGY 28
3.1 Description of the Study Area 28
3.1.1. Geographic Location of the Study Area 28
3.1.2. Population of the Study Area 28
3.2. Data Source 29
3.3. Study Design 29
3.4. Sampling Design 30
3.5. Data Collection 30
3.6. Sample Size Determination 30
3.7. Sampling techniques 32
3.8. Method of Data analysis and Discussion 32
3.9. Model Specification and Testing Validity of the Model 33
3.10. Ethical Considerations 33
3.11. Time frame of the project work 34
3.11.1. Time Frame of Research 34
CHAPTER FOUR 35
4. DATA ANALYSIS AND INTERPRETSTION 35
4.1. Introduction 35
4.2. Response rate analysis 35
4.3. Determinants of financial performance of damota branch omo microfinance institution. 36
4.3.1. Capital structure is major determining factor for financial performance of microfinance institution 37
Source: primary data 37
4.3.2. Capital adequacy is major determining factor for financial performance of microfinance institution 37
4.3.3. Operational efficiency is major determining factor for financial performance 38
4.3.4. Size of firm or total asset of firm is major determining factor of financial performance of microfinance institution 39
4.3.5. Number of borrowers is major determining factor of financial performance of microfinance institution 39
4.4. Factors which affect financial performance omo microfinance institution 41
4.5. Interpretation of major determining independent variables 47
Source: Primary data 52
4.6. Regression model summery 52
4.6.1. Simple Regression Analysis 53
CHAPTER FIVE 59
5. SUMMERY, CONCLUSSION AND RECOMMENDATION 59
5.1. Introduction 59
5.2. Summary of the study 59
5.3. Conclusions 61
5.4. Recommendations 62
5.5. Limitations of the study 62
5.6. Suggestions for further research 62
Appendix I 64
Appendix II 70
Appendix III 70
REFERENCES 71

Acknowledgement

Next to God the completion of this work cannot go without acknowledging the contribution made by some few special people who devoted their time and intellectual abilities to make this study fruitful.
Therefore, my special thanks goes to my instructor and advisor Dr. Durga Rao for his constructive suggestions and invaluable advice both in personal and by phone, without his assistance and guidance this study would not have been completed at least, at this present form.
I equally thank department and faculty of Accounting and Finance for kindness and encouragement in every aspect.
I would also like to thank and acknowledge the contributions of employees of damota branch omo microfinance institution for their invaluable help during data collection time, by providing me with all necessary financial data.

List of Tablespages
Table 4.1. Capital structure is determining factor for financial
performance of microfinance institution—————————————————————–37
Table 4.2. Capital adequacy is determining factor of financial
performance of microfinance institution—————————————————————–38
Table 4.3. Operational efficiency is major determining factor of financial
performance of microfinance institution—————————————————————-39
Table 4.4. Size or total asset of microfinance institution s major determining factor
of financial performance of microfinance institution————————————————–39
Table 4.5. Number of borrowers or outreach to the borrowers is major
determining factor of financial performance of microfinance institution————————–40
Table 4.6. Branch existence and networking with branch is major determining
factor for the financial performance of microfinance institution————————————41
Table 4.7. Inflation rates affects the financial performance of microfinance institution——–41
Table 4.8. Real interest rates affect the financial performance of microfinance institution—–42
Table 4.9. level of income to citizens affects the financial performance
of microfinance institution——————————————————————————–43
Table 4.10. Administrative costs affect the financial performance
of microfinance institution——————————————————————————–43
Table 4.11. Education level of citizens affects the financial performance
of microfinance institution——————————————————————————44
Table 4.12. Leverage level of institutions affects the financial performance
of microfinance institution——————————————————————————45
Table 4.13. Existence of microfinance market affects the financial performance
of microfinance institution——————————————————————————45
Table 4.14. Outreach or existence of branches affects the financial performance
of microfinance institution—————————————————————————–46
Table 4.15. Risk management level of institution affects the financial performance
of microfinance institution——————————————————————————46
Table 4.16. Profitability of institution affects the financial performance
of microfinance institution—————————————————————————–47
Table 4.17. Corporate governance provision affects the financial performance
of microfinance institution——————————————————————————47
Table 4.18. Short term debts have positive effects on outreach programs
in your microfinance institution————————————————————————48
Table 4.19. There is difficulty in accessing long term debts
in your microfinance institution————————————————————————48
Table 4.20. The cost of risk of the debt financing is very high thus affecting
the financial performance of the microfinance institution——————————————49
Table 4.21. Capital structure and financial performance of omo MFI—————————-49
Table 4.22. Capital adequacy and financial performance of damota
branch omo microfinance institution——————————————————————50
Table 4.23. Age of microfinance institution is determining factor
for financial performance——————————————————————————50
Table 4.24.Number of borrowers and financial performance
of microfinance institution—————————————————————————–52
Table 4.25. Operation efficiency and financial performance
of microfinance institution—————————————————————————-53

Table 4.26.Correlation analysis———————————————————————-64
Table 4.27. comparisons of expected and resulted variables values
of correlation coefficients ——————————————————————————66

List of Figures

Figure 1. Conceptual Framework———————————————————————-27

List of Acronyms
MFI Microfinance institution
AEMFI Association of Ethiopian microfinance institution
NBE National Bank of Ethiopia
ROAReturn on asset
SMEs Small and medium scale enterprises
DBOMFI Damota Branch Omo Microfinance institution
H Hypothesis
Q Questionnaires
ANOVA Analysis of Variance
SPSS Statistical package for social science
FSS Financial self sufficient
OSS Operational self sufficient
OS Operational efficiency
FM Firm size
CS Capital Structure
CA Capital Adequacy
NB Number of borrowers
AGE Age of microfinance institution
OMFI Omo microfinance institution
CGAP Cumulative groups to assist poor

Abstract
Financial sector plays vital role in the economic development. It is generally agreed that a strong and healthy performing business institution is a prerequisite for sustainable economic growth. Financial sector mainly includes banking system and MFI in country Ethiopia. Therefore, MFI promises to reduce poverty level. To achieve this amazing objective MFI have developed strong enough financial performance. Thus to answer research title: determinants of financial performance of MFI in Ethiopia especially in study area; at what extent and by what factors mostly financial performance determined from the period of 2013 to 2017. The study was based on primary data from staff respondents and five years’ time series secondary data obtained from annual reports and used descriptive statics plus tools of multiple regression model in order to describe the relationship between variables. Regarding explanatory variables, capital structure ratio, capital adequacy ratio, operational efficiency ratio, firm size ratio, and numbers of borrowers affects the financial performance of MFI.
The finding of study shows that external macroeconomic and internal microeconomic factors determines the financial performances of MFI were identified according to respondents’ side. The outcome of the study identified the positive and negative relationship of variables and its impacts up on financial performance which measures return on assets. As a finding of study, capital adequacy ratio, operational efficiency ratio, firm size ratio, numbers of borrowers and age ratio of MFI have inverse relationship up on profit measurement of ROA. Both firm size and age of microfinance institution affects institutional financial performance significantly. Finally, researcher had recommended for further research that should include and concentrated by coming researcher.

Key words: financial performance, Microfinance institution, sustainability, operational efficiency, total size of asset, Return on asset

CHAPTER ONE
1. Introduction
This chapter deals with the introductory part of the study. It includes: – background information of the study, statement of the problem, research hypotheses, objectives of the study, significance of the study, scope of the research, limitation of the research, conceptual framework and organization of the study.
1.1. Background of the Study
Micro-finance Institutions are financial sectors basically related to all financial intermediation services such as savings, credit, funds transfers, insurance, pension and remittances among others by financial institution in both rural and urban areas to low income earners (Robinson, 2001). Microfinance institutions(MFIs) help in reducing poverty by providing the sustainable credit facility to the poor to start a small business. According to Gallardo, in many developing countries the formal financial sector serves and provides services only for five to twenty percent of the total population and the number of formal institutions are very limited (Gallardo et al, 2003). So that informal financial sector mainly microfinance institution should serve society by improving financial performances. The microfinance sector, apart from being a critical component of the financial system, is also regarded as a poverty reduction strategy for developing countries (kyereboah-coleman, 2007). Following the issuance of proclamation 40/1996, which provides for the establishment of microfinance institutions, various microfinance institutions have legally been registered and started delivering microfinanceservices (Wolday, 2000). So that, development of microfinance institutions in Ethiopia is a recent phenomenon of 1990s.
Investors, small and medium scale enterprises looking to put their money into microfinance face the daunting or manageable task of determining which institutions are most suitable for their investment objectives. Unlike traditional investments, there are few bench-marks and little commentary on the best-performing microfinance institutions (MFIs). A lack of transparency on the risk, lack of financial and social performance, lack of capital adequacy, capital leverage, capita liquidity and management of MFI asset or size of a firm presents a significant barrier for investors,small and medium scale enterprises to choose the institutions according to institutions financial performance.
MFIs are considered as one of the policy instruments to eradicate poverty and to encourage different groups by providing starting money for small business. Therefore, in order to sustain their tremendous contribution to the poorest and developing society in the current dynamic macro-economic environment, they have to periodically research and revisit the major determinants of their performance especially financial performance. Given the above rational, the purpose of this study is to investigate the determinants of financial performance of MFI in Ethiopia specifically in wolaitasodo city level over a period of five fiscal years (2013-2017) in selected omo microfinance institutions.
MFIs provide financial services to the poor people those who cannot provide collateral, thus they may highly face default risk when borrowers fail to repay their obligations as per the agreement. Accordingly, the findings of the study may have put implications for MFI and policy makers in that it provides hint on some important determinants and significant variables of financial performance and quality of performances in the firm.
The entire work of research wouldprove that the financial performance of the firm by identifying determining factor through applying efficiency and productivity, Operating Expense Ratio, Personnel Productivity, financial management,Debt/Equity Ratio, Return on Equity, Return on Assets, which whether positively or negatively influences the financial performance of the selected institution.
1.2. Statement of the problem
Micro finance institution sector, whether it is governmental or private, play a great role in supporting the economic activities of the rural and urban poor people in developing countries. Studies show that African microfinance institutions are important actors and wings in the financial sector, and they are well settled to grow and reach the millions of potential clients who currently do not have access to mainstream or formal financial services (Lafourcade et al., 2005).
Many studies which are conducted on microfinance institutions also indicate that, the contribution of these institutions for poverty alleviation is significant. But the institutions face many challenges that inhibit their contribution for the development of the country. Hurissa(2012) identified the challenges of microfinance institutions by conducting research on the selected MFIs in Addis Ababa city. But the conclusion of Hurissa’s research is limited to the selected microfinance institutions in Addis Ababa City and the situation can vary from one microfinance institution to another. So it is difficult to use her conclusions for all microfinance institutions.
Ebisa et al. (2013) conducted the research that though the strengths of the Micro Finance sector outweigh its weaknesses, there are still big challenges facing the microfinance institutions. This study alsoconclude that the significance of microfinance institution is unquestionable. They contribute a lot to support the Ethiopian poor whoare out of the formal banking system living in both rural and urban. In this research, the researcher tried to identify the positive and negative factors which determine the financial performance of the microfinance institution at a wolaitasodo city level but the conclusions are more general and do not show only the case of MFIs in wolaitasodo city separately because there are common challenges which occurs in another MFIs.
Different researcher has conducted researches on MFIs related with only institutional performance in limited areas and this study focused on filling this research gap by focusing on assessment of the factors which determine the financial performance of selected micro finance institutions in the study area, namely Damota branch omo microfinance institutions, which is operating in the wolaitasodo city of wolaita zone with the following guiding basic research questions:
1. What are the major factors which affect the financial performance of microfinance institution in Damota branch OMFI?
2. What are the major determining factor of the financial performance of the specified institution?
3. Which determining factors are directly related to the financial performances of MFI?
4. Does capital structure, capital adequacy, outreach to customers, firm size, maturity of firm and operational efficiency influence the financial performance of specified micro-finance institution?
5. What are the major determinants behind the success and failure of microfinance institution?
The purpose of this project is to analyze the financial performance of microfinance institution. So far, most research tried to assess the impact of microfinance institutions on poverty, women empowerment, income generation, agricultural productivity and encouraging medium and small scale enterprises that goes with the government strategic plan etc. Apart from that, this research tried to assess whether the microfinance institution is financially and operationally sound or not. Basically the paper tried to answer the above questions by merging into questions like:
• Do MFI have good financial and operational performance?
• What are the major indicators of financial and operational performance?
• What are the determinants of best financial performances?
This research project believed to be significant in improving the operation of microfinance institution by clearly indicating the performances of institution. The performance indicators showed where the position of MFI is and that will help them to improve their performances.
1.3. Objectives of the Study
1.3.1. General Objectives of the Study
The main objective of this study is to investigate the determinants of financial performance of
Microfinance institutions in Ethiopia especially in geographic area of wolaitasodo city level.
1.3.2. Specific Objectives of the Study
Specifically, the study will address the following objectives;
1. To assess and identify major determining factor that affect the financial performance of omo microfinance institution;
2. To establish the influence of the capital structure on financial performance of the Damota branch omo microfinance institutions;
3. To examine the influence of capital adequacy on financial performance of omo microfinance institution;
4. To assess the influence of number of the borrowers on financial performance of the selected microfinance institutions;
5. To analyze the influence of operational efficiency, firm maturity and firm size on financial performance ofDamota branch omo microfinance institutions;
1.4. Significance of the Study
As mentioned above, the main objective of the study will be to investigate the determinants of financial performance of microfinance institutions in Ethiopia. Therefore, the findings of the study are expected to be significant in that it:
• Will also initiate microfinance institutions to give due emphasis on the management of identified variables.
• Will provide microfinance institution’s managers with understandings of activities that would enhance their performance.
• Will help the decision makers such as NBE, clients, etc. to watch out the determining factors of MFIs performance and give due focus for the factors in all aspects of their decision making.
• Will provide determining factors of financial performance for the stakeholders and investors.
• Will introduce to the government and other financial sectors about the annual financial performance and speeding by supporting economic realization aspects.
• Will also provide a guide for further studies in the area.

1.5. Scope of the study
This study is delimited only to the assessment of determinants of the institutional financial performance of selected MFI operating in wolaitasodo city, mainly Damota branch OMFI. The study will include Operation managers, human resource heads, and finance managers, finance related staffs, internal auditors and Accountant of MFI within Wolaitasodo City branch office. The financial terms with independent variables of the research paper like capital structure ratio(CSR), capital adequacy ratio(CAR), operational efficiency ratio (OER), logarithm of total assets (SIZE) and non – financial terms like numbers of borrowers and maturity of firm in determining their effect on dependent variable performance of microfinance institutions of return on assets (ROA) are expressed well in comparison with statement of the problem. The problems related to the different aspects of financial performance and organizational viability by determining variables were the points going to be driven out.
1.6. Limitation of the Study
The research involves majority of primary data. Researcher expects that the project paper may have some limitations due to the following reasons:
• Limited coverage of the study, i.e. the study covers only governmental MFI operating in wolaitasodo,
• Limited data sources of the microfinance institution happened
• Due to that lack of adequate reports and financial statements from the institution researcher tried to get related and unrelated documents during the Study missed a lot of time by referring manually documented secondary data.
• This study was confined only to the identification of the key determinants of financial Performance of the selected Microfinance Institutions in Wolaitasodo by analyzing the financial statements that was from 2013 to 2017 fiscal year.
1.7. Research Hypothesis
Although many quantitative research studies use research questions more formal statement of research employs research hypothesis. These research hypotheses are predictions about the outcome of the results or a statement created by the study to speculate the outcome of the research. The hypothesis may be written as alternative hypothesis specifying the exact results to be expected (more or less, higher or lower of some quantity). Hypothesis can also be stated in null form, indicating no expecteddifference or no relationship between groups of dependent and independent variables as stated by (creswell 2009).
Therefore, the study develops the following hypothesis:
? Hypothesis 1 (H1): Capital structure has a significant effect on the MFI financial performance.
? Hypothesis 2 (H2): Capital Adequacy Ratio has a significant effect on the MFI performance.
? Hypothesis 3 (H3): Number of borrowers has a significant effect on the MFI financial performance.
? Hypothesis 4 (H4): firm size has significant effect on MFI financial performance.
? Hypothesis 5 (H5): operational efficiency has significant effect on institutional performance.
1.8. Structure of the Study
This research has five chapters. The first chapter is an introduction which includes background of the study, statement of the problem, objective of the study, delimitation, and methodology that was used to collect and analyze data. The second chapter discuss on review of related literature including empirical and conceptual framework for the analysis. Under this section relevant published literatures, journals and other research work that are previously done on similar areas were thoroughly discussed in a manner to achieve the objective of the study and help the data analysis. The third chapter is more about research methodology and conversion of data. Chapter fouris analysis and interpretation of data and major findings. It deals with the MFIs financialperformance that is operating in wolaitasodo. Finally, in chapter five, conclusions and recommendations are to be included.

CHAPTER TWO
2. LITERATURE REVIEW
2.1. Theoretical framework
A) Definition of Microfinance Institutions
The definition of microfinance institutions proposed by some authors and organizations are seemingly different from one another. But every authors and organizations agrees with that, microfinance institution mainly provides financial services such as loans, deposits, payment services, money transfers to the poor and low income households for their microenterprises and small businesses to enable them to raise their income levels and improve their living standards.

B) Core Principles for Microfinance institutions
Initially microfinance institution starts its operation by putting a bench mark that rely on core principles like;
• The poor needs access to appropriate financial services.
• The poor has the capability to repay loans, pay the real cost of loans and generate savings.
• Microfinance is an effective tool for poverty alleviation.
• Microfinance institutions must aim to provide and secure financial services to an increasing number of poor people.
• Microfinance can and should be undertaken on a sustainable basis.
• Microfinance institutions and their programs must develop microfinance industry toward greater performance and reach sustainability.
Different authors and organizations have defined Microfinance institutions in different ways. However, the concept or the meaning of the definitions is usually the same in which microfinance refers to the provision of financial services; mainly savings and credit to the poor and to low income households both in urban and rural areas that have no access to formal banks service. Consultative Group to Assist the poor (CGAP,2012) defined “microfinance” the provision of formal financial services to poor and low-income people, as well as others systematically not benefited from the financial system. As indicated that, Microfinance is not only providing a range of credit products for consumption, smoothing for business purposes, to fund social obligations for emergenciesbut also savings, money transfers, and insurance purposes.
The other researcher defined about microfinance institution is that, it offers financial services to poor people. Then the aim of access to financial services for poor people is to alleviate poverty, to build their assets, to improve their income, and furthermore to contribute the development of focal community (Cull et al, 2009).
2.1.1. History of Microfinance Institution in Ethiopia
Initially, micro-credit started as a government and non-government organizations motivated plan to support the disadvantaged and poor group. Following the 1984/85 G.C. severe drought and famine, many Non-governmental organizations(NGOs) started to offer micro credit along with their relief activities although this was on a limited scale and not in a sustained manner (Alemayehu, 2008).Although the development of deposit taking microfinance institutions started only in 1996, the industry has shown outstanding growth. Since 1996, National Bank of Ethiopia(NBE) has registered 30 microfinance institutions to deliver financial services to the poor. As of 2008 G.C, these MFIs had an active loan portfolio of about ETB 4.5 billion delivered to 2.3 million active borrowers and 3 million total active clients.
They also mobilized savings of about ETB 1.9 billion (USD 144 million). The average size of loans in 2006 was about USD 170 million, which indicates that MFIs target the active poor and also do a significant amount of their business (54%) with women. Despite their strong growth, MFIs provide less than seven percent of the total national loan portfolio, again with government-owned MFIs playing the major role (Woldayet al,2010).
2.1.2. Performancemeasurement in MicrofinanceInstitutions
Performance of aninstitutionshallbemeasuredfromtheobjectives of the organizations angel.Themain goal of microfinance institution is to eradicate poverty and to improve the living standards of the poor both in rural and urban areas. In the early days when microfinance institution started, they werefinanced by donor funds, that have a main goal ofpoverty eradication and improving the living standards of poor people. Hence the financial performance of the microfinance institution is measured on how much microfinance institutions reach to the poor(outreach) and impact that measures how far thelives of those who get financialservices are changing as compared to thosewho don’t getthese services in both rural and urban areas is still a major problem with the aspect of the standards of the institutions. But as the microfinance sector grows in size, the need for increasedfinancingcoupled with unpredictability of donor funds trigger the issue of building a sustainable microfinance institutionthat standon their own leg and secure the objectives of the institutions with its predicted goals i.e.microfinance institutions shall start coveringtheir own cost of operation whether it is administrative or operational, from their program revenue is become the intention of the stakeholders. Sustainability is loosely defined as the ability of a microfinance institutions to cover its operating and other costs from generated revenue and provide for profit.Capital adequacy is doubted in many cases and is still a question from both clients and from stakeholders. It is an indicatorwhichshow microfinance institutions can be runningdependent (free)of subsidies and guarantee their financial as well as operational efficiency.

The different perspective on which the microfinance institutions financial and total(institutional) performance is to be measured has created twoopposing but having the same goals school of thought about the microfinance industry. Thefirst onearecalled welfares and thesecondone institutionists.Welfaristsdebate and argue that microfinance institutions can achieve institutional sustainability without achieving financialsustainability and institutional performance is base for the financial sustainability.They contend that donations serve as a form of equity and as such donors canbeviewedas social investors from outside and inside to get ensured donations from the investors there must be institutional sustainability. Unlike privateinvestorswho purchaseequity in publiclytradedfirm, social investorsdon’t expect to earn monetary returns from such social investment (BasuandWoller, 2004). On the contrary, institutionistsargue that unless we buildsustainable microfinance institutionthatare capableof running independent of subsidies otherwise the promise of microfinance institutionoferadicating world poverty will not be met. They argue that sustainable microfinance institutionhelps to expandthe services andreach morepoor people.Hence evenif thetwoschoolsofthought seemcontradictory,they areactually not. Their goalis eradicatingpoverty and improving the lives of poor people. Their difference lies on how to go about it. Welfarists say we have totarget the very poor and profitability shall be secondary. They prefer to charge subsidized andlow interestrates by relyingon donor funds. Institutionist argues donor funds are unreliableand microfinance institutionsmust by themselves generate enoughrevenues to reach more poor people in thefuture.They favormarginally poor customer.They charge higher interest rates and focus onEfficiencyof MFIs to generateprofit and reach morepoor.

The debate between the two schools of thought is endless and today many players in the MFI sector use both thewelfarists and institutionalist perspective to assess the performance ofMFIs. However, there seem many unresolved problems. Many MFI can’t reach a significant portion ofthe world poor; they can’t be free from subsidies. Mixed results are read on the services provided by the institutions and the goals settled on lives of thepoor people. Can we serve thepoorbut still financially self-sufficient?Is the microfinance institutions model and operation correct? Ifthat is so whatare hindering of them toachieve the targets and goals thatthey set? Whatoptimal solution is available forthe microfinance institutions in reaching the poor and being financially self-sufficient? To answer these and related questions, the researcher conducts searching ups and downs with respect to guiding research questions. The financial performance of microfinance institution is measured in many parameters.Thisincludes: –
? Portfolio Quality indicators: Portfolio qualityratios provide information on the Percentage of non-earningassets, which in turn decrease the revenue and liquidityPositionofmicrofinance institutions. Some of themeasures used include the repayment rates, arrears rate(unpaid money rate),Portfolio atrisk, delinquent borrowers(broke the law of borrowers), loan loss reserve ratio(LLRR), andloan loss ratio(LLR).
?Productivity and efficiency ratios: Productivity and efficiency ratios provide information about the rate at which the MFI generate and expand their revenue to cover allexpense. Productivity refers to the volume of business that is generated output for a givenresource or asset. Common measuresof productivity include the number ofactive loans per credit officer, and average portfolio outstanding per credit officer. On the other hand, efficiency refers to the cost per unit of output. Common efficiencyratiosinclude operating cost ratio,salaries and benefitsto average portfoliooutstanding, averagecredit officersalaryas amultiple of per capita GDP, cost per unitof currencylent,and cost perloan made.
?Financial viability indicators: Financial viabilityrefers to the ability of the MFI to cover its costs with earned revenue. A financially viable microfinance institution will not rely on donorfunding tosubsidize its operation. Common indicators here include financial spread, Operational Self Sustainability (OSS), Financial Self Sustainability (FSS) and Subsidy dependence index.
? Profitabilityindicators: These indicators measure the MFI net income in relation to thestructure of itsbalance sheet. Commonmeasures include Return on Equity, Return on Assets, and Return on Business
? Leverage and capital adequacy ratios:Leverage refers to the extent to which a MFI borrows money relative to its amount ofequity. Inother words, it answersthequestionof how many additional dollars(money) can be mobilized from commercial sourcesfor every dollar worth of funds owned by the microfinance institution.The most widely used measure of leverage is thedebt equity ratio.
?Capital adequacy refersto the amount of capital aMFI haverelative to its assets. Capital adequacy means there is a sufficient level ofcapital required to absorb potential losses while providing financial sustainability. Themeasure used for capitaladequacyis the ratio of capitalto risk weighted assets.
?Scale and depth of outreach indicators. These are non-financial indicators ofperformance. Scaleofoutreach indicatethe scale of theMFI activities as measuredbythe number of clients served with different type of instruments such as saving andcredit. Depth of outreach measures the typeof clientsserved and their poverty level.
2.1.3. Sustainability of Microfinance
Apart of the above approaches of evaluating performance, the sustainability of microfinance is another yardstick of concern. Guntz (2010) pointed that sustainability in simple terms refers to the long-run continuation of the microfinance program after the project activities have been terminated. It entails that appropriate systems and processes have been put in place that will enable the microfinance services to be available on a continuous basis and that the clients continue to benefit from the services in a routine manner. This also would mean that the program would meet the needs of the members through resources raised on their own strength, either from among themselves or from external sources.

As the concept of microfinance came into focus, the question of whether supports from donors are necessary in the long term existence and the issue of sustainability of such institutions as well is raised. It could be argued that the long term sustainability of MFIs is not important as long as money is given to micro entrepreneurs and a startup help is accorded. This would imply that sustainability of micro enterprises is more important than the long term existence of financial institutions that supported the start up. As MFIs seek to reach as many poor people as possible in the long run to fight against worldwide poverty, it is clear that the outreach is only possible on a sustainable and efficient basis.
2.1.3.1. Financial Sustainability
Financial sustainability indicates the ability of a MFI to survive in the long run by means of its own income generating activities without any contributions from donors (AEMFI, 2013). As per the MIX Market definition, the term financial sustainability is considered to have an operational sustainability level of 110% or more, while operational sustainability is viewed to have an operational self-sufficiency level of 100% or more. Financial sustainability therefore refers to the ability of microfinance to cover all of its costs on an unsubsidized basis or without accepting donations. United Nations, consider sustainability a necessity to reach a larger number of people on an ongoing basis (Elia, 2006). If MFIs remain dependent on limited donor funds, they can reach only a limited number of people. Financial sustainability is not an end in itself but is the only way to reach significant scale. To analyze the sustainability of an MFI, two known set of ratios have been developed. These are widely accepted and they enable a comparison among MFIs all over the world. The ratios are Operational Self Sufficiency (OSS) and Financial Self -Sufficiency (FSS).
Operational Self-Sufficiency (OSS) (%) = Operating income
Operating expenses
Measures the degree to which operating income covers operating expenses. If the calculated value is greater than 100%, the evaluated organization is considered to be operationally self-sufficient. In microfinance, operationally sustainable institutions are able to cover their costs through operating revenues. Whereas
Financial Self-Sufficiency (FSS) (%) =Adjusted operating income
Adjusted operating expenses
Indicates the degree to which operating income covers adjusted operating expenses. The adjustments try to show how the financial picture of the MFI would look like on an unsubsidized basis or free from donations. Financial self-sufficiency requires adjustments for different reasons. Financial statements must be adjusted to conform to standard accounting practices, to take into account inflation and to delete the effects of subsidies and in-kind donations. FSS shows how an MFI would look like if funds had been raised on a commercial basis and if services or equipment had been purchased at a market rate and were not received as a donation (Elia, 2006). Operational self-sustainability is when the operating income is sufficient enough to cover operational costs like salaries, supplies, loan losses, and other administrative costs. Meanwhile financial self-sustainability is when MFIs can also cover the costs of funds and other forms of subsidies received when they are valued at market prices (Meyer, 2002). Other theories include:

I)Profitability Theory
Not all MFIs become sustainable, and are able to retainprofits, or even to break-even and therefore still depend on support from donors and those subsidizing. The rapid growth in the industry is not due to a golden “one-way-road” to profitability since there are still big diversities among MFIs and their operations (Joergeson, 2011). This idea hugs in the explanation of the theory of banking practices that may lead to the profitability of MFIs.

II) Market Power Theory
Applied in banking, the Market Power hypothesis puts that the performance of bank is influenced by the market structure of the industry (MFI sector). There are two distinct approaches that explains Market power theory; the Structure-Conduct-Performance (SCP) and the Relative Market Power hypothesis (RMP). According to the Structure-conduct-power approach, the level of concentration in the banking market gives rise to potential market power by banks, which may raise their profitability (Njerl, 2012). Banks in more concentrated markets are most likely to make abnormal profits by their ability to lower deposits rates and to charge higher loan rates as a results of collusive (explicit or tacit) or monopolistic reasons, then firms operating in less concentrated markets, irrespective of their efficiency.

Unlike the Structure-conduct-power, the Relative market power hypothesis states that bank profitability is influenced by market share. It supposes that only large banks with differentiated products can influence prices and increase profits. They are able to exercise market power and earn non-competitive profits. The above theoretical analysis shows that Market power theory supposes bank profitability is a function of external market factors.

III) Efficient Structure Theory
The efficient structure hypothesis, on the other hand states that banks earn high profits because they are more efficient than others. There are also two distinct approaches within the Efficient Structure (ES): The X-efficiency and Scale efficiency hypothesis. According to the X-efficiency approach, more efficient firms are more profitable because of their lower costs. Such firms inclined to gain larger market shares, which may manifest in higher levels on market concentration, but without any causal relationship from concentration to profitability (Athanasoglou et al., 2006). The scale efficiency hypothesis approach emphasizes economies of scale rather than differences in management or production technology. Larger firms can gain lower unit cost and higher profits through economies of scale. This makes it possible for large firms to acquire market shares, which may manifest in higher concentration and then higher profitability. The efficiency structure on the other hand like the Portfolio theory largely assumes that bank performance is influenced by internal efficiencies and managerial decisions (Njerl, 2012).

IV) Portfolio Theory
The portfolio theory approach is the most important and plays a great role in bank performance studies. As per the Portfolio balance model of asset diversification, the best possible holding of each asset in a wealth holder’s portfolio which is a function of policy decisions determined by a number of factors such as the vector of rates of return on all assets held in the portfolio, a vector of risks associated with the ownership of each financial assets and the size of the portfolio (Ibid). The portfolio theory further explained as portfolio diversification and thedesired portfolio composition of commercial banks results are of decisions taken by the bank management.

Further, the ability to obtain maximum profits depends on the feasible set of assets and liabilities determined by the management and the unit costs incurred by the bank for producing each component of assets. Portfolio theory largely supposes that bank performance is influenced by internal efficiencies and managerial decisions (Ibid).
2.1.3.2. Conceptual Framework
The figure below outlines the conceptual framework of the study from the literature that will be reviewed as well as the model of assessment

Figure 1. Conceptual Framework
Source: Researcher’s own construct based on literature

2.2. Empirical Framework of Research
2.2.1. Determinants of Financial performance of MFIs
MFIs financial performance could be affected by a number of determining factors. In most literatures Microfinance institutions profitability and efficiency are usually expressed as a function of internal and external determinants. Muriu (2011) pointed out that the determinants of MFIs profitability could be divided into internal determinants which are management controllable and the external determinants, beyond the control of management. Empirical literatures in relations to determinants of MFIs financial performance are very limited. Previous studies carried out in the area highly depended upon theory of retail banking financial performance by assuming that MFIs also provide banking services to the poor. Following are elaborations of empirical studies in connection with determinants of MFIsfinancial performance.
2.2.1.1.Portfolio Quality
Portfolio indicates the total funds available for the MFI as loans to its clients. Portfolio quality is a measure of how well or how best the institution is able to protect such portfolio against all forms of risks. Portfolio quality is a critical area of performance analysis, since the largest source of risk for any financial institution resides in its loan portfolio. Portfolio quality is a vital area of analysis, since it is the largest source of risk for any financial institution. Therefore, as much as possible, MFI’s must try to maintain the quality of their portfolios. For this study, portfolio quality is measured as portfolio at risk over 30 days (PAR ;30 days).

According to Muriu (2011), in “what explains the low profitability of MFIs in Africa” he tried to find out the factors contributing to profitability of MFIs. Using the Generalized Method of Moments (GMM) system and an unbalanced panel dataset comprising of 210 MFIs across 32 countries operating from 1997 to 2008, he carried out the study. The proxies for profitability were both ROA and ROE. He found out that Credit risk measured by the sum of the level of past loans due 30 days or more (PAR;30) and still accruing interest was negatively and significantly related to MFI profitability. The study therefore found evidence to support the conjecture that increased exposure to credit risk was normally associated with lower MFI profitability. Lafourcade et al. (2006) on the “Overview of the Outreach and Financial Performance of Microfinance Institutions in Africa” considering 163 MFIs from 25 countries showed that MFIs around the world continue to demonstrate low PAR values; 30 days, with a global average of 5.2 percent. However, African MFIs maintain relatively high portfolio quality, with an average PAR values ; 30 days of 4.0 percent, performing better than their counterparts in South Asia (5.1 percent), Latin American Countries (5.6 percent), and East Asia (5.9 percent).

When MFIs are faced with poor portfolio quality, they may write off the loans from their books or re-finance the loans by extending the terms, changing payment schedules, or both. The result showed that a loan at risk was negatively correlated with MFIs financial performance. Bartualet al. (2011) measured the performance of MFIs that have a banking side and a social side, using a goal programming based multi criterion methodology. The authors found that the two categories representative of the general performance tendency are: Overall financial performance, risk and liquidity followed by institutional characteristics which represent the size of the company, then by expenses. By carrying out a spearman correlation analysis in order to analyze the correlation between each of the single -criterion measurements and the final performance, they found that only two variables have highly significant correlations with multi criterion performance: ROE and Portfolio quality were the two key factors for improving MFIs’ performance. In addition to this study, my current study found that firm size which measures logarithm of total asset and maturity of a firm that measures age ratio of firm were two key factors which determines the financial performances of firm by using the spearman correlation and stepwise analysis which carries out the significant relationship between each single variables and financial performance which basically measures growth of the firm.

In determining the factors which have relationships with financial performances of the MFIs, Ayayi and Sene (2010) analyzed a sample of 217 MFI of various legal forms and originating in 101 countries of the various parts of the sphere. The authors used financial self-sufficiency as independent variable and results showed that the quality of loans portfolio, interest rate, and productivity have positive impacts on the financial viability of MFIs.
2.2.1.2.Capital Asset Ratio
The capital assets ratio is a simple measure of solvency of MFIs. The ratio helps an MFI to assess its ability to meet its obligations and absorb unexpected losses. The determination of an acceptable capital to asset ratio level is generally based on an MFI assessment of its expected losses as well as its financial strength and ability to absorb such losses. Expected losses should generally be covered through the provision of MFI’s accounting policies, which remove expected losses from both assets and equities. Thus, the ratio measures the amount of capital required to cover additional unexpected losses to ensure that the MFI is well capitalized against potential shocks. Equally MFIs with low capital ratios are riskier in comparison with better capitalized financial institutions.
2.2.1.3.Gearing Ratio/Debt to Equity Ratio
The debt to equity ratio is calculated by dividing total liability by total equity. Total debt includes everything the MFI owes to others, including deposits, borrowings, account payable and other liability accounts. According to (AEMFI, 2012), The debt/equity ratio is the simplest and best known measure of capital adequacy because it measures the overall leverage of the microfinance institutions. The debt to equity ratio is a common measure used to assess a firm’s leverage, or in other words the extent to which it relies on debt as a source of financing (Lislev et al., 2012). Microfinance institutions that employ higher debt in their capital structure are more profitable, and highly leveraged microfinance institutions are more profitable (Muriu, 2011). Besides, a higher debt ratio can enhance the rate of return on equity capital during good economic times (ibid). The significant correlation between performance and gearing ratio is an indication that perhaps more debt relative to equity are used to finance microfinance. Activities and that long term borrowings impact positively on profitability by accelerating MFIs growth than it would have been without debt financing (Ibid).

According to Nelson (2011) the Rural Bank inAshaiman municipality recorded a debt/equity ratio of 50.89 in 2007 but increased to 54.05 in 2008. It increased further to 61.65 in 2009 and to 77.35 in 2010 showing an average of 60.99%, depicting that most of its operations were financed by debt instruments and should probably be regulated. The savings and loans recorded a rapid increase from 0.30 in 2007 to 0.8 in 2008. This again increased sharply to 2.97 in 2009 and to 4.89 in 2010 with an average of 2.24, signifying that savings and loans were approaching the borrowing limits leading to the curtailment(reduction) of growth. The Credit Union’s debt/equity decreased throughout the study period from 0.89 to 0.61 to 0.45 to 0.77 respectively, implying that more equity is used to finance business than debt. This is very much connected to where the MFI is located in its life cycle.

Traditionally, the funding structure follows a certain pattern over the life cycle of a MFI. Startups are characterized by a larger dependency on donations, usually in the form of equity grants, whereas the more mature MFIs tend to display higher debt leverage through borrowing and even evolve into a formal institution or a regulated niche bank. Some MFIs even access capital markets by issuing bonds or by going public IPO(Joergensen, 2011). Dissanayake (2012) points out that debt/equity is a statistically an insignificant predictor variable for the model at 5% level of significance.
2.2.1.4. Size of Microfinance (Total Asset) of microfinance institution
Another factor that can affect the financial performance of a MFI is its size. The size of a MFI is measured by the value of its assets (Hermes et al., 2008). According to (Cull et al. 2007), the size of a microfinance institution is significantly positively linked to its financial performance of the institutions. This variable is included to capture the economies or diseconomies of scale. There is consensus in academic literature that economies of scale and synergies arise up to a certain level of size. Beyond that level, financial organizations become too complex to manage and diseconomies of scale arise. Total asset of MFIs is used as a proxy of size.

It is argued that profitability of an institution is influenced partly due to lack ofeconomies of scale. This implies that profitable MFIs in Cameroon have a greater control of the domestic market, and therefore lending rates may remain high while deposit rates remain lower since larger MFIs may be perceived to be safer, therefore this high interest rate spread translates to and sustains higher profits margins. According toCull et al. (2007) point out that the size of MFIs and financial performance are significantly related but loan size is negatively related to financial performance. This means;institutions that make smaller loans are not necessarily less profitablebut the result showed that, larger loan sizes are associated with lower average costs for both individual based lenders and solidarity group lenders. Since larger loan size is often taken to imply less outreach to the poor, the result could have negative implications. Firm size is measured a variety of ways, including natural log of sales and natural log of total assets. Therefore, firm size or total asset of firm measures total assets and their natural logarithm terms. Firm age is measured by natural log of one plus firm age.
Firm size (Total assets) = natural logarithm of total assets (nlog of total asset)
2.2.1.5. Operationalor costs Efficiency
Operational efficiency is a performance measure that shows how well MFIs is streamlining its operations and taking into account the cost of the input and/or the price of output. Efficiency in expense management should ensure a more effective use of MFIs loan able resources, which may enhance MFIs profitability. Higher ratios of operating expenses to gross loan portfolio show a less efficient management. Another dimension of Operational efficiency is managing operating expenses for management quality. The performance of management is often expressed qualitatively through subjective evaluation of management systems, organizational discipline, control systems, quality of staff, and others (Ongore;Gemechu, 2013).

According to NimalSanderatne (2003) cited by Dissanayake (2012), in the study of the determinants of financial viability showed that operational efficiency and low administration costs have an important bearing on the Financial performance of MFIs. Dissanayake (2012), operating efficiency is proxy by operating expense ratio which is adjusted operating expense divided by adjusted average gross loan portfolio and he concludes that operating expense ratio is statistically a significant predictor variable in determining return on assets ratio. In line with this idea Muriu(2011) concluded that inefficiency in the management of operating expenses significantly decrease MFI profitability.
2.2.1.5.1. Capital Structure and Performance of Microfinance Institutions
The combination of various sources of capitalstructure could affect profitability. Therefore, sustainability of microfinance institutions also affected. According to Woller and Schriner (2002) the various sources that affect profitability and sustainability includes deposits, loans, and shares. Several studies have been conducted to explain whether the capital structure determines the financial performance of microfinance institutions or not. According tokyereboah (2007) found that highly leveraged microfinance institutions have higher ability to deal with moral hazards and adverse selection than their counterparts with lower levelratios. Moreover, Ganka(2010) states that although how the capital has been structured, affects the performance of microfinance institutions, having different sources of capital don’t improve financial sustainability. The study also identified that equity is a relatively cheaper sources of financing and, therefore improves financial performance of microfinance institutions. Robinson(2001) asserts that a large number of clients depend on microfinance commercial sources of funds, which in turn depends on performance of microfinance institutions. This suggests that microfinance institutions with higher capital are expected to have more clients than those with less capital. Apart from the volume of the capital, the combination of various components of the capital could also affect profitability and therefore the performance of microfinance institutions. Similarly, Wambugu and Ngugi(2012) in their study on factors influencing financial sustainability of microfinance institutions in Ethiopia found a correlation between capital structure and financial sustainability of microfinance institutions. With the above findings in mind, the current study seeks to establishbetween capital structure and performance of microfinance institutions in Ethiopia specifically in damota branch omo microfinance institution.
In financial management, capital structure theory refers to a systematic approach to financing business activities through combination of equities and liabilities. Competing capital structure theory explore the relationship between debt financing, equity financing and the market value of the firm. Capital structure of microfinance institution was measured by debt to equity ratio both debt and equity of institution can be found from the income statement of the institution.
Capital structure ratio = Debt/Equity Ratio
2.2.1.5.2. Capital Adequacy and Performance of Microfinance Institutions
Capital adequacy pertains to requirements for organizations conducting investments/financial business to have sufficient funds and acts as measure of financial strength (upchurch, 2005). According to (up church, 2005) capital adequacy has been cited as a crucial factor in sustainability of any organizations and it is more so important in the business of using other people’s monies’ such as banking. Chritin et al, (2005) notes that due to high volatility and scarce geographical diversification of MFIs, the capital adequacy ratio should be high to ensure sustainability. The primary function of capital to serve as a support on loaned funds to absorb losses that may occur. It also serves the function for the acquisition of physical assets. The capital affords the “engine and bomber” that keeps the MFI going as well as taking up vicious shocks and the more a capital a bank has, the better it is able to sustain losses without running into insolvency.
The study investigates the impacts of the capital adequacy ratios as independent variable which tests proposition with dependent variable represented by return on assets(ROA) that the higher the return on assets the better liquidity and capital adequacy.
Capital adequacy ratio (working capital ratio) = current asset/current liability
2.2.1.5.3. Number of Borrowers and Performance of Microfinance Institutions
Various studies have used the number of borrowers as a measure of performance of microfinance institutionsespecially financial performance of microfinance institutions (Harmes et al, 2008, mersland&strom, 2009; Ganka, 2010); It is generally assumed that the larger the numbers of the borrowers the better the financial performances of the microfinance institutions. According to harmes et al, (2008) the larger number of borrowers is found to be the biggest sustainability factor. On the contrary, Ganka(2010)in the study conducted on tanzania governmental microfinance institutions reported the negative and significant relationship between number of borrowers itself doesnot improve the financial sustainability of microfinance institutions. The reason could be increased inefficiency as result of increased number of borrowers. However, Hartarska (2005) reports states that number of borrowers had no significant impact on financial sustainability but it has significant relationship with financial performance if the institutions.
2.2.1.5.5. Operational Efficiency, productivity and financial performance of microfinance institutions
The operational efficiency and productivity of MFIs is the measure of how the institutions measures its operating costs in relation to the portfolio yield (MIX, 2005). Efficiency for a microfinance institution as well as other financial institutions is very important as it implies a rational or goodUse of inputs as well as outputs and thus ensures survival of the institution (Nieto, 2006). In other Words, an MFIs pursuit of efficiency enables it to develop appropriate products lines, target its Market efficiently and remove obstacles in the supply of MFI products(Abayie et al,2011).The Efficiency and productivity like other dimensions of MFI financial performance is measured by the use of ratio indicators (The SEEP network and alternative credit technologies, 2005). Seep Network (2011) provides the indicators that measure efficiency with the following ratios that most popular operating is viewed as operational efficiency. It is often used, along with return on assets and return on equity to measure institutions efficient use of capital and managerial resources.
Operational efficiency ratio measures how well a business manager manages its resources and uses them to produce profits. Operational efficiency is measured by total expense to total revenue that,
Operational efficiency ratio = Total Expense/Total Revenue
2.2.1.5.6. Age of Microfinance institution
There is a thought that as MFIs mature, and thus acquire experience in their sector; they increase their likelihood of attaining financial sustainability when they get mature in their operation. This can be explained by the fact that MFIs gradually improve their control over all operations related to issuance of micro credit related performance through continues evaluation of the performance. In other case, MFIs that have considerable experience in the microfinance sector have diligently applied credit risk management and general efficient management techniques to attain financial sustainability (Ayayi, 2010). According to Cull et al, (2007) Sustainability could relate to the age of MFI. The age refers to the period that a MFI has been in operation since its initial inception. Studies indicate that the MFIs age relates to the financial performance. Jorgensen, (2011) states
that Age, is grouping by new (1 to 4 years), young (5-8 years) or mature (more than 8 years). The number of years is calculated as the difference between the year they started their micro finance operations and the year of data submitted by the institutions. The age of microfinance institution has positive impact on profitability of MFI measured by microfinances dual objectives of financial sustainability and outreach. Age of MFI institution is measured by number of years’ experience since establishment of MFI that size and age have great impact on performance MFI. Firm age is measured by natural log of one plus firm age.
Firm Age = Nlog1+firm age
2.3. Active clients per staff members
The active clients per staff member measures the microfinance institution’s personnel overall productivity management of clients that includes borrowers, voluntary depositors, agents and other types of clients. The ratio should be calculated as Number of active clients/ Total number of personnel.
Active clients per staffs = Number of active clients/Total number of personnel
2.3.1.Portfolio to assets
This ratio indicates how much a MFI allocates to its primary business of micro-credit which is
Also most of the time it’s most profitable business. Low results may be an indication of inadequate use of assets while high results may indicate inadequate liquidity levels. It is calculated as follows: Gross loan portfolio/Total assets. Katsushi. S. Imani, RaghanGaiha and Ganesh Thapa (2011) in their discussion paper on the performance of MFIs (2011, p8) stated that the efficiency of a MFI would be measured or analyzed by both its personnel cost as well as its administration cost with a lower ratio being a good indicator high efficiency in its operations. This involves minimization of cost and maximization of income at a certain level of operation, and it has great impact on financial sustainability of microfinance institutions (Kinde,2012). Efficiency in management of expenses should ensure a maximization of use of MFIs loanable resources, which may in turn enhance profitability thus a higher ratio of operating expenses to gross loan portfolio indicate a less efficient management (Muriu, 2011).
According to Barres et al. (2005) and Kipesha (2013), efficiency is important in an institution
including MFIs for various reasons including:
1. Resources are limited and donors of MFIs are usually not willing to fund the MFI with all
the required resources thus the available resourceshave to be used efficiently.
2. The emergence of MFIs by development expertise as apromising and new tool for poverty alleviation has increased the need for themto be efficient in the use of public funds such as deposits of its clients.
3. The potential of microfinance industry to become profitable has led to a large number of commercial banks and other private investors to engage in microfinance business with better use of the resources, more efficiency in their operations and reduction of the amount of resources worsted and lastly most of the donors are now interested in funding MFIs which indicate efficiency and sustainability.Portfolio to assets calculated as follows:
Portfolio to Assets = Gross loan portfolio/Total assets.
2.3.2. Market Concentration
Birhanu (2012), defines market concentration as the number, size and distribution of banks in a particular market or country. As indicated in other empirical studies, market concentration is captured by the Herfindahl-Hirschman (H-H) index which is the sum of the square of market share of the sample banks included in a particular study. The market share of each bank is measured by the ratio of the bank’s total asset to total assets of all banks (Gajure& Pradhan, 2012). Since highly concentrated market lacks proper competition as to setting the price of banking services, it makes the existing banks more profitable. However, when the concentration of the market is reduced and the size and distribution of banks become more dispersed, the banking sector profitability is expected to reduce. Flamini (2009) studying the determinants of profitability of commercial bank in Sub-Saharan Africa, concluded that market concentration has no direct effect on bank profitability. Athanasoglou et al. (2005) also examined and concluded that market concentration affects bank profitability negatively, in an insignificant manner. Similarly, Molyneux and Thornton (1992) in their study carried out on the determinants of European bank profitability, showed that market concentration has a positive, statistically significant correlation with pre-tax return on assets which are consistent with the traditional structure conductperformance paradigm. Market share of each bank is measured by:
Market share of banks = The ratio of the bank’s total asset / Total assets of all banks
Profitability of Retail Banking
There are large differences among banks, financial institutions or intermediaries especially considering the customers they serve. Retail banking is, however, the banking practice closest to microfinance institutions and is therefore interesting to look into its profitability. Conventional retail banks borrow from people who have surplus of money and lend to those in deficit. The bank thereby makes money on the interest spread between the two, called the net interest income. In the retail bank about half to three -quarters of the income generated come from the intermediation role. The rest of the revenue comes from a number of other services such as insurance, money transmission, advisory services, investment and taxation, card and factoring services etc. All the services put together represent the non-interest income for the retail banks.

A key and great factor of success for conventional retail banks is getting enough customers. This is equally considered as a key factor for MFI’s, but for different reasons, which depend on the purpose of the MFI, whether it is socially or economically inclined (Joergensen, 2011). It is obvious that the objective of conventional retail banks is profit making. Profits are therefore in proportion to their sizes (total assets), though with some advantages of economies of scale. Since the microfinance industry is not as developed as the conventional banking industry, it is not expected that profit is in proportion to size (total assets), and also because the institutional motives and their products vary differently than those of retail banks.
Retail banking sector use investors to provide start-off and running capital but in return the investors receive equity in the business, thus owning part of the company. The company’s profit and the investors’ return on equity (ROE) are closely correlated. Retail bank shareholders would like the highest possible ROE, considering ten percent as below average, fifteen percent as the standard, and 20 percent as excellent. Looking at MFIs only some have investors, yet the issue of investors is an interesting benchmark as much as ROE of MFIs is concern. Retail banks do however have to take on some risk, with the result of losing some money. If they lose too little they will have no customers because they will be excluding a major part of the population which they could lend to, but loose too much, and the bank can face bankruptcy under this condition. MFIs operate or perform under a very different approach, where they take bigger risks; however, they find ways to compensate for the risk.MFIs charge higher interest rates to the borrower through innovative methods such as joint liability. This new approach opens up a much larger market segment than was before in banking (ibid).
Profit and Profitability
Sometimes, people used the term “Profit” and “Profitability” interchangeably. But in real sense, there is a difference between the two. Profit is an absolute term, whereas, profitability is a relative concept. However, they are closely related and mutually interdependent, having distinct roles in business. Profit refers to the total income earned by the firm during the specified period of time, whereas, profitability refers to the operating efficiency of the firm. It is the ability of the firm to make profit on sales and get sufficient return on the capital. Weston and Brigham (1972), noted rightly that for financial management, profit is the test of efficiency and a measure of control, to the owners, it is a measure of the worth of their investment, to the creditors is the margin of safety, to the government it is a measure of taxable capacity and a basis of legislative action and to the country, profit is an index of economic progress, national income generated and the rise in the standard of living, whereas profitability is an outcome of profit”. In other words, no profit drives towards profitability (Ibid). According to Al-Shami (2008), there are different ways to measure profitability such as: return on asset (ROA), and return on equity (ROE). Return on Asset indicates how profitable a company is relative to its total assets. It gives an idea as to how efficient management is in using its assets to generate earnings. While, return on equity measures a company’s profitability which shows how much profit accompanies generate with the money shareholders have invested. This measure gives a sense of how well a company is in using its money to generate returns.

CHAPTER THREE
3. RESEARCH METHODOLOGY
3.1 Description of the Study Area
3.1.1. Geographic Location of the Study Area
WolaitaSodo is located in the Southern Nation’s Nationalities and Peoples Region on the way to Arba Minch-Jinka high way; 330 km south of Addis Ababa via Hosana road. The town has total area of 92.2 Square km and divided in to three sub towns. These three sub towns are Arada, Mehal and Merkato sub towns. It is the administrative center of the Wolaita Zone of the Southern Nations, Nationalities, and Peoples Region, WolaitaSodo has a latitude and longitude of 6°54?N 37°45?E with an elevation between 1600 and 2100 meters above sea level. Despite being located in the Northern Hemisphere, Sodo is actually cooler in the “summer” than the “winter” due to much higher rainfall in the high-sun season, a phenomenon common to Sodo’s region (Municipality, 2012)
3.1.2. Population of the Study Area
According to the result of new projected Census result of 2007, the Sodo City administration has a population of 108,560, out of which 55,930 are male and 52,630 are female. Sodo city administration expanded its geographic existence to increase social and economic services for the people by adding in 29,099 populations out of which 17,501 are male and 11,598 are female and the total population of wolaitasodo city administrative area are 137,659 out of which 73,431 are males and 64,228 females in 2017 and its 92 square meter according to wolaitasodo city Municipality office.Sodo City has social and economic services those rendered by various development actors including Government, Non-Government Organization and community at large for the last decades including education, health, infrastructure and roads. The availability of these services and resources in the city has been playing major roles for development of the country at large.
Although there are numerous research designs, the study employed a descriptive research design. Descriptive research design was appropriate as it enables researcher to generalize the concepts of implications and the finding to a large population. The focus of this study was to establish the determinants of financial performance of microfinance institutions in Ethiopia specifically in wolaitasodo city Damota branch omo microfinance institutions. The study utilized quantitative approaches in the collection of data from the institutions. According to Kothari (2009), the approaches enables data to be systematically collected and analyzed in order to provide a descriptive analysis and account of both dependent and independent variables under the study. The study focused on managers, accountants and finance related employs of all microfinance institutions those are operating in wolaitasodo city Damota branchomo microfinance institutions.
3.2. Data Source
The study generates the required data from both primary and secondary sources. However, majority of data collected from primary source. As to the primary data, information collected from target Damota branch omo microfinance institution staff and junior managers. A representative sample prepared prior to the actual survey on the basis of the service that institutions provide to the society and actual financial performance of the institutions that contribute for the increment of the investment with in the city administration. In order to generate adequate data and to examine the performance of the institution, the qualitative and quantitative data have been collected. As to the secondary data, information gathered from annual reports and different publications which documented with in institution gallery.
3.3. Study Design
To achieve study objective researcher took both the exploratory and descriptive nature since the study is meant to know the actual financial performance that needs information including economic, social, institutional, and psychological and other wings. It was take the position of descriptive in describing general socio-economic characteristics of the branch staff members by age group, level of experience, address, andlevel of education etc. The study was exploratory since it implements methods to investigate the socio- demographic, economic, institutional and financial aspects of the institutions with its strategic plan.
3.4. Sampling Design
Within the objective of meeting the esteemed key questions of the study, it focused only staff members and finance related agents who have stayed for 2 years and above with branch institution. Because this helped researcher to identify the financial performance of the institution, barriers of the institutional financial performance if the institution, to identify the internal and external factors which determine the financial performance of the institutions which in turn, gives to the researcher a clue to study the factors that affect annual financial performance of the staff. Because the study has been interested in studying the financial performance of the institution and collaboration with the strategic plan of the country especiallygeographic location of wolaitasodo city, that limited the sample to staff members. It also focused on number of the borrowers(clients).
3.5. Data Collection
The researchhad concentrated on primary data through by developing research questionnaires to managers, finance related accountants and other staff membersand secondary data had been collected by using annual reports of the Damota branch omo microfinance institution.Secondary data was collected from financial statements of the selected microfinance institution and again secondary data collected from MFI’s records and publications. This was used to specifically help in identifying the financial performance of the institutions. Data from the annual reports have been collected over a period of five years (2013-2017) to ensure the objectivity. This secondary analysis involved the combination of one data set with another, that address new questions or use new analytical methods for evaluation (Szabo &Strang, 1997).The research comprehensively relies on the data gathered from respondents who were staff members and worked in institution for more than two service years.
3.6. Sample Size Determination
The financial management process of the MFIs involves across sections of individuals and departmental heads of the MFIs since they play a major role in decision making and ultimately the performance of the MFIs. For the purpose of the study, the population comprised all the 3 managers and remaining finance related employees there by making the population of the study is going to be 38 employees of MFIs in wolaitasodo city Damota branch omo microfinance institutionsaccording to Damota branch omo microfinance institution human resource manager. Fine years quality data the purposive sampling is and survey method selected to collect the staff member’s perception by using structured questionnaire. According to Singh, (2006) when the subjects used in the sample is all staffs using total survey sampling technique is appropriate.
From the target staffs of 38 employees, a sample of 38 employees which is a true representative of the population have been used in research question. The size that conducted considered selection based on the time, budget allocations, and population distribution among other factors. The researcher thereforeconducted simple probability sampling techniques in selecting respondents. Simple probability sampling method is equal with total survey method where the researcher consciously gives equal chance to respondents who was included in the sample. Data was collected primarily using questionnaires since questionnaire is the best tool for a researcher who wishes to acquire the original data for describing a population. The researcher tried to attempt personally to administer the questionnaires to ensure correct information is received from the respondents. To ensure the validity, the researcher will use accurate measuring instruments, standardize data collection procedures by guiding the respondents appropriately and carry out piloting to determine usefulness of instruments, clarity in terminology, focus of questions, relevance and applicability, time required and methods for analysis. Up on the completion of the field work, the quantitative data was coded, entered in SPSS software version 20 and cleaned and verified. The entire analysis was done following two level of analysis: In the first level, all the qualitative data was processed and analyzed separately. Reliability has been determined through the Cronbach alpha coefficient analysis. Since test of all alpha values should be greater than 0.70 in analyses should be reliable and the data collection tool was deemed or trusted should be reliable. The purpose of the analyzing the relationships of each of the independent variable on the dependent variable, the study used regression analysis to test the hypothesis of the study. Pearson correlation coefficient and stepwise method was used to identify and test the strength of a relationship between two sets of data. Correlation coefficients of variables, regression model summery and ANOVA output was analyzed in order to find out relationship between variables, significance and insignificance of variables and impact of variables. It is often used as a statistical method to aid with either proving or disproving a hypothesis andthe study were hypothesized the following relationships:
ROAit= Boi+B1(OE)+B2(FS)+B3(CAR)+B4(CSR)+B5(AGE)+B6(NB)
Where ROA= return on asset of omo microfinance institution
CSR= capital structure ratio of MFI
CAR= capital adequacy ratio of MFI
NB= numbers of borrowers of MFI
FS= Firm size or total asset of MFI
OE= operational efficiency of MFI
AGE= Age or maturity of MFI.
With regard to sample size determination, the study will use a census (total survey) method which determine the whole number of staff concerned in the study area.
3.7. Sampling techniques
The research is quantitative and qualitative in type and descriptive in statics, for this purpose, the researcher used both non-probability sampling techniques. Researcher decided to take data from the branch to get adequate information from both primary and secondary sources. Though, out of expectation researcher faced challenges through searching secondary data. Due to that researcher used SodoZuriya and Wolaita Zone Microfinance institution department in the same building which is very important to share related data and information of the branch. Because of their homogeneity of service provided for customer’s microfinance institution in many aspects, the researcher was used annual report although data were not available in selected microfinance institution.This means the Head Offices is located in same building withDamota branch omo microfinance institution and this gave a great chance to share related information from the upper department.
3.8. Method of Data analysis and Discussion
Different factors may be considered affecting the Institutional financial performance of MFIs. The institutional financial performance of the MFIs was evaluated with respect to the achievement of institutional goals, Ethiopian legal and regulatory framework for ownership and governance of MFIs, the capacity of employees of the MFIs, and Products and Services Offered by the Selected MFIs. The research is descriptive in type andnon-probability sampling techniques were employed for this study. Employees, managers and clients of MFIs were the major target groups of the study. The financial performance of the microfinance institution was assessed on the Sustainability, Profitability, Efficiency and Productivity of the selected MFIs.Qualitative and quantitative data generated by using questionnaires and analyzed in the course of data collection with the help of the target respondents by describing or narrating and interpreting the situation deeply so that the real picture of the institutional viability and financial performance were understood clearly. Moreover, primary data generated from respondents of a firm were analyzed by using descriptive statistics such as percentages and frequency with atables was used in reporting and defining the results. The secondary data collected from financial statements and balance sheets were analyzed by SPSS V20 and interpreted. Finally, results were presented with a mean and standard deviation.
3.9. Model Specification and Testing Validity of the Model
To find the relationship between dependent variable, financial performance, and independent variables, the research were used multiple linear regression model which is extension of linear regression model and that predicts the value of variables based on the value of two or more other variables. It is believed that, this model more represents the interrelationship among two or more independent variables that associate the values of the determinant variables. The paper identified six microfinance indicators as independent variables: capital structure, capital adequacy, number of borrowers, firm size, age of microfinance institution and operational efficiency (productivity of the institutions) in determining their effect on dependent variable performance of microfinance institutions, up on return on assets (ROA). Published and unpublished documents assessing weakness and strength of a firm including project proposals, semi-annual progress reports, minutes annual financial and fiscal year reports were reviewed to get background information about the institutional financial performance, projects undertaken by institution was the primary sources of secondary data and information.
3.10. Ethical Considerations
In the process of the study, the following ethical issues have been considered. In order to obtain an informed consent from the respondents, the purpose of the study was explained clearly. Members and leaders of the Damota branch omo microfinance institutions, project officials, and Sodo City Administrators shall be asked to give their informed consent orally before filling out the questionnaire or participating in any discussion. Information obtained from the respondents promised to be kept confidential. Necessary efforts were made so that the languages in the data collection tools would consider the culture, religion, work behavior and the comprehending level of the respondents.
3.11. Time frame of the project work
3.11.1. Time Frame of Research
The work plan outlines activities to be carried out in the specific period of time. Hence, the proposed project work scheduled from starting to the completion period is presented as follows even though there is ups and downs of schedule in table 1:
Table 3.1: – project schedule
Major Activities Duration in Months,2017/2018
Dec-2018 Jan-2017 Feb-2017 March-2018 April-2018 May-2018 June-2018 Remark
Proposal Writing
Proposal Presentation
Questioner Development
Data Collection
Data Processing
Data analysis and Interpretation
Submission of first draft
Submission of final draft
Source: researcher time frame schedule

CHAPTER FOUR
4. DATA ANALYSIS AND INTERPRETSTION
4.1. Introduction

This chapter describes the data analysis and presents the results with intent of meeting the research objectives and answering the research questions. The study further discusses the characteristics of respondents and the response rate and presents the finding with respect to the determinants of financial performance of damota branch omo microfinance in wolaitasodo city administration.
4.2. Response rate analysis
The researcher sought to find out the distribution of the questionnaires to the respondents according to their gender, educational level, working experience and work position in selected microfinance institution.
MFI Population Questionnaires distributed Questionnaires received Response rate
Damota branch omo MFI 38 employers 38 38 100%
Source:Field data of survey research 2018
Questionnaires collected from all 38 respondents by researcher even if the time to complete the questionnaires by respondents through with a full challenge of time with employer’s respective work. The good opportunities for the researcher was that the MFI is locally owned and researcher visits daily the institution for the progress of fulfilling the questionnaires that in turn reduced delay of collecting questionnaires in the final analysis. Total of 38 questionnaires were coded and analyzed by representing 100% of research populations and the response rate was fully fair to conduct the analysis and to draw conclusion from the finding.
The focus of experience and work position was mainly on number of years worked in the current microfinance institution with respective working position. According to the finding majority of the employees are male (63.2%)while female was 36.8%. The reason behind this may be due to the existing gender gap in employment in Ethiopia and the nature of the work in the sector which requires a lot of movement and outreach activities.
Regarding the educational level of respondents, the finding shows that 7.2% of respondents had diploma while 92.1% of the respondents had degree and above which was attributed to the increased expansion of higher education opportunities and initiation of workers upgrading toward professional education in Ethiopia as well. The study further wanted to establish to working experience of the respondents. This was very important since major previous study indicated strong relationship between working experiences of employees and financial performances of MFI. Cumulatively less than (26.3%) of respondents had 5-10 years and above 10 years working experiences and most of respondents (73.6%) had between 1-2 years and 3-6 years working experiences in current MFI. This finding can be opine with the fact that most governmental business institutions have employees on short term contracts in attempt to minimize human resources costs, maximize productivity and to enhance employee’s performance which ultimately agreed toward enhanced performance of microfinance institutions.
Study further deduced that 39.5% of the respondents from employer holds customer relationship officer with in MFI office and out of office compared with 28.9% of the respondents from employer holds accountants which process the financial transaction horizontally and vertically for the clients and 21.1% of the respondentsfrom the employer holds branch operational manager while 10.5% of the respondents from the employer holds both internal auditor and customer agent of the institution. Cumulatively this can be attributed to the fact that institution gives high care for the clients that most of the employees 39.5% of total are customer relationship officer.
4.3. Determinants of financial performance of damota branch omo microfinance institution.
The respondents were asked to indicate whether they agree or disagree that various factors that determine the financial performance of respective MFI or not, and their finding were presented with respective tables.

4.3.1. Capital structure is major determining factor for financial performance ofmicrofinance institution
The respondents were asked if capital structure is a factor which determine the financial performance of MFI. A majority of respondents (73.7%) replied that they agreed with issue that capital structure affect the financial performance of omo microfinance institution. The finding of the research results was that capital structure is determining factor that mainly increase in capital structure of the institution which measures both debt and equity will increase the financial performance of the institution by providing well developed framework for every investment.
Table 4.1. capital structure and financial performance of microfinance institution analysis
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly disagree 1 2.6 2.6 2.6
Disagree 5 13.2 13.2 15.8
Undecided 4 10.5 10.5 26.3
Agree 15 39.5 39.5 65.8
Strongly agree 13 34.2 34.2 100.0
Total 38 100.0 100.0
Source: primary data
4.3.2. Capital adequacy is major determining factor for financial performance of microfinance institution
71.1% of the respondents opine that capital adequacy is the determining factor of financial performance of a firm. The finding shows that when the capital is adequate with in a firm, the performance of the firm will increase in turn when the capital is not adequate, the entire movements of the institution will decrease due to weak access to capital that measures the percentages of risk weighted credit exposure up on capital.

Table 4.2. Capital adequacy and financial performance of microfinance institution analysis
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly disagree 1 2.6 2.6 2.6
Disagree 2 5.3 5.3 7.9
Undecided 9 23.7 23.7 31.6
Agree 15 39.5 39.5 71.1
Strongly agree 11 28.9 28.9 100.0
Total 38 100.0 100.0
Source: Primary data
4.3.3. Operational efficiency is major determining factor for financial performance
65.8% of the respondents indicate they had agreed that the operational efficiency is a major determining factor for financial performance of microfinance institution. 26.3% of respondents were replied that they were unsure or neutral that the operational efficiency was a determining factor or not for a financial performance of microfinance institution. The remaining 10.5% of respondents replied that they disagree with the issue that operational efficiency is a determining factor for the financial performance of microfinance institution. From the response, the researcher noted that operational efficiency is the measuring point that should be kept well because every performance of the institution is directly or indirectly touched with operational efficiency of the institution. Finally, the operational efficiency is determining factor for the well stated financial performance of the institution.
Table 4.3. Operational efficiency and financial performance analysis
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly disagree 1 2.6 2.6 2.6
Disagree 2 5.3 5.3 7.9
Undecided 7 18.4 18.4 26.3
Agree 15 39.5 39.5 65.8
Strongly agree 13 34.2 34.2 100.0
Total 38 100.0 100.0
Source: Primary data
4.3.4. Size of firm or total asset of firm is major determining factor of financial performance of microfinance institution
Concerning the size or total asset of microfinance institution which is major determining factor of financial performance, table 4.4 shows that 60.5% of respondents have chosen that they agree with the concept size or total asset of the institution is major determining factor for the financial performance of the institution. Whereas 26.3% of the respondents replied that they were undecided or neutral about the issue that the total asset is determining factor of financial performance or not. However, 10.5% of the respondent’s blame or disagree with the factor that is not a major determining factor for the financial performance of the institution.
Therefore, the finding behind the concept is that one way of maximizing the total asset of the institution is maximizing the financial performance of the institution and this again improves the institutional performance as well.
Table 4.4. Size of firm and financial performance analysis
Frequency Percent Valid Percent Cumulative Percent
Valid Disagree 4 10.5 10.5 10.5
Undecided 6 15.8 15.8 26.3
Agree 13 34.2 34.2 60.5
Strongly agree 15 39.5 39.5 100.0
Total 38 100.0 100.0
Source: Primary data
4.3.5. Number of borrowers is major determining factor of financial performance of microfinance institution
55.3% of the respondents agreed that number of borrowers or outreach to the borrowers is major determining factor for the financial performance of the institution whereas 21.1% of the respondents were unsure that the number of active borrower was whether determining factor or not the financial performance of the institution and the remaining 10.5% of the respondents disagreed on the issue of the determining factor for the financial performance of the institution. In conclusion number of active borrowers as a measure of outreach reflects actual service delivery capability of MFI. Especially this reflects the truth in case when the institution reaches to the borrower, the asset and value of institution will increase at the broad with regard to the saving mobilization and overwhelming performance that contribute for development of the economy.
Table 4.5. Numbers of borrowers and financial performance analysis

Frequency Percent Valid Percent Cumulative Percent
Valid Strongly disagree 1 2.6 2.6 2.6
Disagree 3 7.9 7.9 10.5
Undecided 4 10.5 10.5 21.1
Agree 13 34.2 34.2 55.3
Strongly agree 17 44.7 44.7 100.0
Total 38 100.0 100.0
Source: Primary data
4.3.6. Age of microfinance institution is major determining factor for financial performance
63.2% of the respondents replied that age is determining factor for financial performance and the remaining 31.6% respondents replied that they disagree with the issue. 5.3% of respondents were neutral and undecided whether age of a firm determines the financial performance of MFI or not. concluding the finding, when both size and age increases the performance of firm that mainly depends on repayment rate, repayment period, lending rates, loan portfolio, client outreach and financial sustainability. Therefore, the age of firm has positive and statistically insignificant effect on their financial performance. On other word, this shows that the younger firms start to see a decline in their profitability from the beginning but they may become profitable again at an old age. So that, the firm life cycle directly related to firm’s financial performance.

Table 4.6. Age of microfinance institution is determining factor for financial performance
Frequency Percent Valid Percent Cumulative Percent
Valid Strongly disagree 3 7.9 7.9 7.9
Disagree 9 23.7 23.7 31.6
Undecided 2 5.3 5.3 36.8
Agree 19 50.0 50.0 86.8
Strongly agree 5 13.2 13.2 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.Factors which affect financial performance omo microfinance institution
4.4.1. Inflation rate is factor which affect financial performance omo microfinance institution
Majority of the respondents (86.8%) in these study indicate that inflation rates affect the financial performance of microfinance institution. The remaining 13.2% of the respondents replied No that inflation rate did not affect the financial performance of the institution. Therefore, this finding is in line with the general notion that macroeconomic stability determined by stable inflation rates plays a great role in financial performances of the MFI.
When there is ups and downs in the economy because of inflation rates it affects lending capacity, repayment period and recruiting creation of new lending members of the institution. So that the inflation rates and lending policy should go parallel which also capacitate the operation of the institution to the good position.
Table 4.7.Inflation rates affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 33 86.8 86.8 86.8
No 5 13.2 13.2 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.2. Real interest rate is a factor which affect the financial performance of microfinance institution.
55.3% of the respondents agree with that the macroeconomic stability determined by stable inflation rates and real interest rates affects the financial performance of the institution. The decrease in interest rates and slight increase in inflation rates even may not make a big difference in economy but when the difference becomes large macroeconomic stability may be disturbed and government should check or revise the policy.
Basically interests are given to loaners and members and the major determinants of interest rates are the demand and supply for money in circulation. Then the circulation of money on the hands of loaners and members should be kept safe in order to become safely manage the total asset of the institution.
Table 4.8. Real interest rates affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 21 55.3 55.3 55.3
No 17 44.7 44.7 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.3. Level of income to citizen affects the financial performances of microfinance institution
92.1% respondents opine that level of oncome of citizens affects the financial performance of the institution while 7.9% of respondents had replied that level of income to citizens doesn’t affect the financial performance of the institution. Therefore, the finding of these research seems that when the income of the citizens did not discount with the proposition especially micro-entrepreneurs with higher incomes have more opportunities to self-finance through saving and they may benefit from the institution easily through family, friends as well as from formal finance. So that the level of income to citizens at all levelgoes up economic shift and poverty reduction will have guaranteed.
Table 4.9.Is level of income to citizens affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 35 92.1 92.1 92.1
No 3 7.9 7.9 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.4. Administrative costs affect the financial performance of microfinance institution
81.6% of the respondents had agreed with that administrative costs and overheads like building rent, office supplies, consulting expenses and insurance will affect the financial performance of the institution. Whereas the remaining 18.4% of respondents replied that they did not agree with the issue that the administrative costs mentioned above did not affect the financial performance of the institution. The response from the respondents implies that when administrative costs and overheads, information costs, communication costs and transaction costs were minimized and the profit of the institution maximized the whole financial performance of the institution relatively safe.
Table 4.10. Administrative costs affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 31 81.6 81.6 81.6
No 7 18.4 18.4 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.5. Education level of citizens affects the financial performance of microfinance institution
The respondents were asked if the education levels of their citizens or clientele, affects the financial performances of their institution and majority of respondents (81.6%) indicate that levels of education of citizens affects the financial performances of institution. The implication of the is that it is argued that economy shift away from primary production (industry and mining) to a more service based economy tend to develop higher demand for micro-financial service which is major market for micro-finance provider. Therefore, the levels of educations influence the kind of economy that the financial institution attempt serve because there is great link in economy between service base economy and growth and existence of informal micro-finance markets.
Table 4.11. Education level of citizens affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 31 81.6 81.6 81.6
No 7 18.4 18.4 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.6. Liquidity level of institution affects the financial performance of microfinance institution
Majority of respondents (86.8%) indicate that level of liquidity if institution influences their financial performance. Liquidity is a concept that many investors fail to take into account as result their financial plans fail to come through in such critical time s as retirement. Therefore, lack of liquidity from investors and financial users may result financial performance problem. Finally, the finding of the research with respect to the liquidity level was to provide relevant finance for the clients and there must be relevant liquidity level with in the institution which matches with the policy of national bank of Ethiopia.
Table 4.12.Liquidity level of institution affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 33 86.8 86.8 86.8
No 5 13.2 13.2 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.7. Leverage level of institution affects the financial performance of microfinance institution
63.2% of respondents indicate that leverage levels of institution affects the financial performance of institution with specific to firm determinants. 36.8% of the respondents replied that they did not accept the issues above. The finding shows that financial institution specially management bodies should ensure that financial decision made by them are inconsonance with the shareholder’s wealth maximization objectives that the amount of debt finance in the financial firm market should be at the optimal level so as to ensure adequate utilization of the firm’s assets.
Table 4.13. Leverage level of institutions affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 24 63.2 63.2 63.2
No 14 36.8 36.8 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.8. Existence of microfinance market affects the financial performance of microfinance institution
63.2% of respondents replied that existence of microfinance markets affects the financial performance of institution and remaining 36.8% did not agree with the issue above. The finding shows that the existence of informal community based microfinance which were not registered formal way and private microfinance markets which struggle for profit maximization affects the financial performance of microfinance institution with respect to the standardized competition of the target institutions.

Table 4.14.Existence of microfinance market affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 24 63.2 63.2 63.2
No 14 36.8 36.8 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.9. Outreach or existence of branches affects the financial performance of microfinance institution
73.7% of respondents agree with that outreach or existence of branches affects positively the financial performance of MFI. 26.3% of respondents replied that thus they did not accept the issues above. The finding shows that since people with low incomes do not have access to financial institutions, and public workers benefit from the service of public banks, the poor and private workers with low incomes cannot borrow from these public banks and hence, reaching poor’s door to door may benefit microfinance institutions financial performance and this becomes answer to those who cannot benefit from financial services of the public banks.
Outreach or existence of branches affects the financial performance of microfinance institution
Table 4.15. Outreach to the poor affects the performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 28 73.7 73.7 73.7
No 10 26.3 26.3 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.10. Risk management level of institution affects the financial performance of microfinance institution
68.4% of the respondents indicate that risk management behavior affects the financial performance of MFI. While 31.6% of respondents replied that this issues did not affect the financial performance of MFI. The finding shows that weak risk management behavior will affect the whole sector if the management of credit, debt to equity, loan provision, non-performing loan, relationship with formal banks and representative offices weak and stand alone. Therefore, operational manager and executive manager of the institution should keep this all safe to keep the institution safe.
Table 4.16.Risk management level of institution affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 26 68.4 68.4 68.4
No 12 31.6 31.6 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.11. Profitability of institution affects the financial performance of microfinance institution

Concerning the profitability of MFI, 84.2% of employees agreed positively. From the total percent of the employees 15.8% of them disagree to some extent. This indicates that even not all MFIs are sustainable, able to return a profit, or even to break even and therefore, still depend on help from donors and subsidies, the rapid growth in capita and improving performance specifically satisfying customers is bench mark for MFI. The main objective of MFI is to provide financial services to the poor and non-bankable population. When compared to main objective, specifically, average profitability is higher in MFI that are efficient, well capitalized and with scale advantages. As a finding, the researcher identified that a professionally higher deposits as a percentage of total asset is associated with improved profitability however, magnitude of effect is very sensitive to the MFI age.
Table 4.17. Profitability of institution affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 32 84.2 84.2 84.2
No 6 15.8 15.8 100.0
Total 38 100.0 100.0
Source: Primary data
4.4.12. Corporate governance provision affects the financial performance of microfinance institution
Regarding corporate governance provision, 78.9% of the respondents agreed that good corporate governance provision have led to significant effect in economic values of a firm like higher productivity, lower risk financial failure, growth and capital adequacy, return on asset, return on equity and bad corporate governance provision decrease the economic values of the firm. Good corporate governance provision includes board size, business management experience of boards, industry specific experiences of boards, board gender diversity, audit committee size and educational qualification of board. So well established board and standardized performances of the boards also forwards the quality of performances positively. When the above mentioned bodies become and when there is good corporate business governance provision is there, two profitability of institution specially return on asset(ROA) and return on equity (ROE) increases while attention should be given for the whole performance of the institution.

Table 4.18.Corporate governance provision affects the financial performance of microfinance institution
Frequency Percent Valid Percent Cumulative Percent
Valid Yes 30 78.9 78.9 78.9
No 7 18.4 18.4 97.4
5.00 1 2.6 2.6 100.0
Total 38 100.0 100.0
Source: Primary data
4.5. Interpretation of major determining independent variables
Table 4.19. Major Independent Variable analysis
SN Variable Standard Name Description Variable Name in simple regression model Expected Effect
1 Capital Structure Ratio Equity/Asset Ratio CSR +ve
2 Capital Adequacy Ratio Current Asset/Current Liability Ratio CAR
-ve
3 Operational Efficiency Ratio Return on asset/Return on Equity or Expense/Revenue OER
-ve
4 Numbers of Borrowers Ratio Weighted by numbers of active borrowers NB
-ve
5 Firm Size Ratio Lnof total asset FS -ve
6 Age of firm Number of years of incorporation AGE +ve
Source: Researcher own expectation of hypothesis
4.5.1. Capital structure and financial performance of Damota branch omo microfinance institution.
The results of analysis on determinants associated with capital structure as it relates with financial performance of institution goes in line with the research objective number three. Majority of respondents agreed with a mean of 3.63 when asked about whether financing in your microfinance institution is out of long term debts. Further with the means of 3.71, 3.57, 3.76, and 3.63 agreed when asked short term debts have positive effects on outreach programs in your MFI, there is difficulty in accessing long term debts in your MFI, the cost of risk of the debt financing is very high thus affecting the financial performances of the microfinance institution and finally capital structure had positively enhanced the performance of the MFI.
The respondents were unsure with a mean of3.42 when asked long term debts have positive effects outreach programs in your MFI. This finding finally yields sensitive information on long term debts have positive effects on outreach programs on your MFI. However, majority of respondents with a mean 3.63 were in agreement that capital structure therefore had enhanced the financial performance of MFI.
Table 4.20.Capital structure and financial performance analysis
Factors N Minimum Maximum Mean Std. Deviation
Financing in your microfinance is mainly out of long term debts 38 1.00 5.00 3.6316 1.14894
Long term debts have positive effects on outreach programs in your microfinance institution 38 1.00 5.00 3.4211 1.26559
Short term debts have positive effects on outreach programs in your microfinance institution 38 1.00 5.00 3.7105 1.22822
There is difficulty in accessing long term debts in your microfinance institution 38 1.00 5.00 3.5789 1.08133
The cost of risk of the debt financing is very high thus affecting the financial performance of the microfinance institution 38 1.00 5.00 3.7632 1.05098
Capital structure therefore has enhanced the performance of the institution or firm 38 1.00 5.00 3.6316 1.40311
Valid N (list wise) 38

4.5.2. Capital adequacy and financial performance of damota branch omo microfinance institution
The finding in this section are in line with fourth study objective of the researcher which analyzes the capital structure and the financial performance of MFI. The respondents on average, agreed that microfinance institution related to a capital adequacy affect client attitude and reduced unfair market segmentation as well as it affects or influences lending practices of your microfinance institution. the respondents agreed with a mean of 4.02 that capital adequacy had enhanced our outreach to the most optimal level and respondents agreed with a mean of 3.92 that capital adequacy therefore had enhanced financial performance of your microfinance institution but the respondents with a mean of 3.42 were unsure when asked your microfinance institution had sufficient capital to cover default in loan portfolio. Therefore, the researcher deduced that capital adequacy, plays a key role in enhancing the financial performance of institution.
The major implication of these research objective is to show that whether capital adequacy plays a key role in enhancing financial performance with a resources to apportion prudential regulations, outreach programs, network expansion with branches and diversification and also it stabilizes the effects of loan portfolio. Therefore, microfinance institution has work towards ensuring financial stability and sustainability of the capital adequacy systems so as to ensure continued positive performance of MFI.
Table 4.21. Capital structure and financial performance analysis
Factors N Minimum Maximum Mean Std. Deviation
Your microfinance institution has sufficient capital to cover default in the loan portfolio 38 1.00 5.00 3.4737 1.00638
Capital adequacy, affect client attitude and reduced unfair market segmentation as well as it influence your lending practices in your microfinance institution 38 1.00 5.00 3.9211 .94101
Capital adequacy has enhanced our outreach to the most optimal level 38 2.00 5.00 4.0263 .71610
Capital adequacy therefore has enhanced financial performance of our microfinance institution 38 1.00 5.00 3.9211 1.04962
Valid N (list wise) 38
Source: Primary data
4.5.3. Firm Size and financial performance of damota branch omo microfinance institution
In this section researcher presents various aspects on firm size by using finding base on 5 point Likert scale. Regarding firm size or total asset, some respondents disagree that firm size has influenced the financial performance of the selected microfinance institution to a great extent with a mean (3.47). Majority of respondents agreed with increasing firm values with firm risk management assisted increasing of the outreach as well as services offered to the clients increase firm size with a mean 4.00, respondents were in agreement that risk management of firm value will increase the number of active accounts with a mean of 3.86 and further the respondents were in agreement that increase in branch will led to an increase in number of active borrowers with a mean (3.73). the respondents therefore in agreement that keeping firm size safe had enhanced the financial performance of the institution with a mean of (3.84). Therefore, the study concluded that risk management of firm is a key determining factor for the financial performance and outreach to the poor.
Table 4.22. Firma size and financial performance analysis
Factors N Minimum Maximum Mean Std. Deviation
Not diversifying branches has influenced the financial performance of your microfinance institution to a great extent 38 1.00 5.00 3.4737 1.35041
Increase firm values with risk management in turn increasing of the outreach as well as services offered to the clients 38 1.00 5.00 4.0000 1.16248
Risk management of firm value will enhance the service delivery and increase the number of active accounts 38 1.00 5.00 3.8684 1.35907
Increase in firm value will led to an increase in number of active accounts 38 1.00 5.00 3.7368 1.28787
Managing firm values therefore enhance the financial performance of the institution or firm 38 1.00 5.00 3.8421 1.07870
Valid N (list wise) 38
Source: Primary data
4.5.4. Numbers of borrowers and financial performance of damota branch omo microfinance institution
The finding in this section is in line with fifth objective of the study. Table 4.5.4 shows that numbers if borrowers affect the financial performance of MFI with a mean (3.63). There has been significant increase in number of active borrowers in your MFI (4.07) that a majority of respondents agreed, the main source of financing in your MFI is interest from active loan borrowers with a mean of (4.31). further your MFI had worked hard to address the issues of client trust, thus reducing the transaction costs and improve repayment rates with a mean of 3.94, respondents were asked thus you had transparency and thus had given voice to its clients which enhances loyalty and commitment of institution with a mean 3.97 and finally, the finding of study that most of the respondents had agreed that numbers of borrows had enhanced the financial performances of MFI with a mean (4.28). Therefore, the study deduced that the number of borrowers influences significantly financial performances of microfinance institution.
Table 4.23. Numbers of borrowers and financial performance analysis
Factors N Minimum Maximum Mean Std. Deviation
The number of active borrower affects the financial performance of microfinance institution 38 1.00 5.00 3.6316 1.30324
There has been a significant increase in the number of active borrowers in your microfinance institution 38 1.00 5.00 4.0789 1.07506
The main source of financing in your microfinance institution in interest from active loan borrowers 38 2.00 5.00 4.3158 .93304
Your microfinance institution has worked hard to address the issue of client trust, thus reducing the transaction costs and improve repayment rates 38 1.00 5.00 3.9474 1.06409
Your microfinance institution has transparency and thus has given voice to its clients which enhances clients loyalty and commitment 38 1.00 5.00 3.9737 1.17374
Number of borrowers therefore has enhanced financial performance of microfinance institution 38 1.00 5.00 4.2895 .92730
Valid N (list wise) 38
Source: Primary data

4.5.5. Operational efficiency and financial performance of damota branch omo microfinance institution
The study sought to rate level of influence and determining factor for the financial performance of each independent variable on the financial performances of MFI. From the finding, evident was collected that the respondents ranked the number of borrowers as the most important and influential factor for the financial performance of MFI. The finding of the study goes in line with second objective of the study. According to the table 4.5.6. capital structure, numbers of borrowers and branch existence were more or less equally play a significant role in the financial performance of MFI. The study sought to establish a trend of Return on Asset(ROA) which is a ratio of average net income and average total assets in the last 5 years.Generally, there was an increase in mean return on assets across damota branch microfinance institution in wolaitasodo city.
Table 4.24. Operational efficiency and financial performance analysis
Factors N Minimum Maximum Mean Std. Deviation
Capital structure has increased the financial performance of your microfinance institution 38 1.00 5.00 4.0789 1.17131
Capital adequacy has made our firm invest more resources on our clients 38 1.00 44.00 5.2632 6.56643
Number of borrowers have increased the financial performance of your microfinance institution 38 1.00 5.00 4.3947 .91650
Branch existence and networking has increased the financial performance of your microfinance institution 38 1.00 5.00 4.2105 1.11883
Valid N (list wise) 38
Source: Primary data
4.6. Regression model summery
This study carried out a regression analysis on the influence of independent variables namely capital structure, capital adequacy, numbers of borrowers, firm size and operational efficiency on the dependent variable return on asset (ROA) presented in the summery.
The R2, the coefficients of determination show variability in dependent variable by the variability in independent variables. This values tells us howfinancial performance of microfinance institution can be explained by capital structure, capital adequacy, numbers of borrowers, firm size and operational efficiency. The R2, values of 0.6374implies that 63.74 % of the variation in the financial performance of microfinance institution was explained by the variations in independent variables. This means that the other factors not studied in this research contribute 37.3% of the financial performance of microfinance institution.
4.6.1. Simple Regression Analysis
The researcher conducted simple regression analysis in order to show the dependent and independent variables relationship. From the simple regression analysis model holding, capital structure, capital adequacy, number of borrowers, firm size and operational efficiency of financial performance of microfinance institution. Therefore, this shows that there is a positive relationship between financial performance of microfinance institution and independentvariables in research study areas.
The unstandardized beta coefficients in Table 4.5.1 were then used Pearson correlation coefficientused to identify and test the strength of a relationship between two sets of data. It is often used as a statistical method to aid with either proving or disproving a hypothesisto obtain the overall relationship of the independent variables and dependent variable.
ROAit= Boi+B1(OE)+B2(FS)+B3(CAR)+B4(CSR)+B5(AGE)+B6(NB)
Where ROA= return on asset of omomicrofinance institution
CSR= capital structure ratio of MFI
CAR= capital adequacyratio of MFI
NB= numbers of borrowers of MFI
FS= Firm size or total asset of MFI
OE= operational efficiency of MFI
AGE= Age or maturity of MFI
The finding indicates that there is unique contribution to the explaining of the independent variables.
Table 4.25. Correlation analysis
ROA OE FS CAR CSR AGE NB
ROA Pearson Correlation 1 -.387 -.962** -.271 .622 -.049 -.028
Sig. (2-tailed) .520 .009 .660 .262 .938 .964
N 5 5 5 5 5 5 5
OE Pearson Correlation -.387 1 .234 .291 .121 .445 .613
Sig. (2-tailed) .520 .705 .635 .846 .452 .272
N 5 5 5 5 5 5 5
FS Pearson Correlation -.962** .234 1 .088 -.805 -.216 -.221
Sig. (2-tailed) .009 .705 .887 .100 .727 .720
N 5 5 5 5 5 5 5
CAR Pearson Correlation -.271 .291 .088 1 .457 .814 .812
Sig. (2-tailed) .660 .635 .887 .439 .094 .095
N 5 5 5 5 5 5 5
CSR Pearson Correlation .622 .121 -.805 .457 1 .750 .740
Sig. (2-tailed) .262 .846 .100 .439 .144 .152
N 5 5 5 5 5 5 5
AGE Pearson Correlation -.049 .445 -.216 .814 .750 1 .957*
Sig. (2-tailed) .938 .452 .727 .094 .144 .011
N 5 5 5 5 5 5 5
NB Pearson Correlation -.028 .613 -.221 .812 .740 .957* 1
Sig. (2-tailed) .964 .272 .720 .095 .152 .011
N 5 5 5 5 5 5 5
**. Correlation is significant at the 0.01 level (2-tailed).*. Correlation is significant at the 0.05 level (2-tailed).
Source: SPSS output

As the above table shows that the correlation coefficient between return on asset (ROA) and operational efficiency (OE) is ( -0.387) or -38.7%. this negative correlation coefficient indicates that there is negative relationship between in ROA and OE. And if the OE is increases, it will have a negative impact on the firm’s performance and the reverse is true. FS also has a negative relationship with the firm’s performance measured by ROA in this study and the correlation coefficient between ROA and FS is (-0.962). this coefficient shows as there is strong negative relationship between these variables. Which indicates that as the firms size increases, performance of the firm measured by return on asset decreases and the reverse is true. Therefore, the firm size is inversely related with the firm’s performance. As of the above variables CAR also negatively related with firm performance. And the correlation coefficients between these two variables is (-0.271 or -27.1%) which shows as there is inverse relationship between CAR and ROA. This revealed that the increase in CAR tends to decrease in ROA. Capital structure ratio (CSR) is positively related with firm performance indicated in the above table. The correlation coefficient between these variables is 0.622 or 62.2 percent. This positive relationship indicates that as the firms CAR increases, its performance also increase and the reverse is true. The relationship between the firm’s performance measured by ROA and its age is inversely correlated and the correlation coefficient between them is -0.049 or -4.9%. This negative correlation coefficient indicates that as the age of the firm is increases, its performance is decreases. In similar fashion, NB also has a negative relationship with the firm’s performance measured by ROA in this study and the correlation coefficient between ROA and NB is -0.028 or -2.8%. this correlation coefficient shows as there is negative relationship between these variables. Which indicates that as the NB increases, performance of the firm measured by return on asset decreases and the reverse is true. Therefore, the NB is inversely related with the firm’s performance.

The standardized correlation coefficients assess the contribution of each independent variable toward the prediction of the dependent variable, since they have been converted in the same scale to show comparisons. The result shows that the firm size of the institution has the highest negative coefficient values of (-0.962) has the greatest influence on financial performance of MFI. This indicates that the increase in one will decrease another variable. The second most important variable that the institution must make safe was operation efficiency (-0.387) and the third highest coefficient of (-0.271). The fourth most important variable was age size of firm(-0.049) and the fifth important variable was number of borrowers(-0.028) and the least important independent variable that positively affect the performance of firm is capital structure ratio (0.622) of this independent variable is capital structure of microfinance institution.
Table 4.26. comparisons of expected and resulted variables values of correlation coefficients
SN
Variable Standard Name
Description
Variable Name in simple regression model
Expected Effect of variables
Resulted Effect of variables
1 Capital Structure Ratio Equity/Asset Ratio CSR +ve -ve
2 Capital Adequacy Ratio Current Asset/Current Liability Ratio CAR
-ve
-ve
3 Operational Efficiency Ratio Return on asset/Return on Equity or Expense/Revenue OER
-ve
-ve
4 Numbers of Borrowers Ratio Weighted by numbers of active borrowers NB
-ve
-ve
5 Firm Size Ratio Lnof total asset FS -ve -ve
6 Age of firm Number of years of incorporation AGE +ve +ve
Source: Correlation coefficient analysis SPSS
As indicated above the table 4.5.2. the expected values of variables and resulted values of variables are the same in independent variable which was increase in maturity ratio tend to increase in performance and profitability of microfinance institution and again when the institution is at younger stage the performance and profitability decrease at same scale. Whereas remaining five independent variables capital structure, capital adequacy, operational efficiency, firm size and numbers of borrowersaffect as internal factor of the institution that increase in one variable would cause decrease in another variable.
The test of statistical significance of the independent variables in the model was done by using t-tests. Results are presented in Table 4.27 that indicates firm size has negative coefficient values when used as predictor to ROA (B=-0.050) and static significance of (-6.083) which is significant at 5% level of significance. This indicates that firm size was significant predictor of ROA. It has negative coefficients indicating that decrease in firm size of the microfinance institution decreases the return on assets and vice versa. The test of statistical significance of independent variables in the model by removing the remaining insignificant variables like capital structure (CSR), capital adequacy ratio(CAR), operational efficiency ratio(OER), numbers of borrowers(NB) the age of firm has negative coefficient values when predictor to ROA (B=-0.014) with static significance of (-0.903) which is significance at 5% level. This indicates the age of a firm was significant predictor of ROA. Therefore, the decrease in age or maturity of a firm in microfinance institution causes decrease in financial performance.

Table 4.27. Test of significance of Independent Variables
Model Unstandardized Coefficients Standardized Coefficients T Sig. Collinearity Statistics
B Std. Error Beta Tolerance VIF
1 (Constant) .943 .140 6.730 .007
FS -.050 .008 -.962 -6.083 .009 1.000 1.000
2 (Constant) 1.202 .071 16.887 .003
FS -.053 .003 -1.020 -18.557 .003 .953 1.049
AGE -.014 .003 -.270 -4.903 .039 .953 1.049
a. Dependent Variable: ROA

The R Squared for regression model presented in table 4.28 was 0.925. Therefore, the model explaining 92.5% of the change in firm size and 99.4% of maturity of a firm with six four independent variables.The finding indicates that 95.95% of two independent variables selected as firm size and age of firm can change a financial performance of microfinance institution.

Table 4.28. Regression Model Summary
Model R R Square Adjusted R Square Std. Error of the Estimate Change Statistics Durbin-Watson
R Square Change F Change df1 df2 Sig. F Change
1 .962a .925 .900 .02579 .925 36.997 1 3 .009
2 .997b .994 .988 .00875 .069 24.042 1 2 .039 2.633
a. Predictors: (Constant), FS
b. Predictors: (Constant), FS, AGE
c. Dependent Variable: ROA
Analysis of variances in the regressionmodel presented in Table 4.29. the f-Value was 36.99 which was significant at 1% level of significance indicating thus the regression model provided some explanatory points that comes with overall variables significance and insignificance. Therefore, regression model shows the values of independent variables up on the dependent variables and on the total performance of the firm.

Table 4.29. Analysis of Variances in the Regression Model (ANOVA)
Model Sum of Squares Df Mean Square F Sig.
1 Regression .025 1 .025 36.997 .001b
Residual .002 3 .001
Total .027 4
2 Regression .026 2 .013 17.598 .000c
Residual .000 2 .000
Total .027 4
a. Dependent Variable: ROA
b. Predictors: (Constant), FS
c. Predictors: (Constant), FS, AGE

CHAPTER FIVE
5. SUMMERY, CONCLUSSION AND RECOMMENDATION
5.1. Introduction
In this chapter, section 5.2 contains the summery of the findings, while section 5.3 provides concussions. On other hand section 5.4 provides recommendations while section 5.5 points out the limitations of the study and finally section 5.6 gives the suggestions for further research.
5.2. Summary of the study
Under this final chapter major empirical finding of the study were summarized and concussions were made. Based on the finding of the study appropriate recommendations provided, and suggestions for the future study given out. Results from descriptive and empirical data obtained from statistics for social science (SPSS) software can be summarized as follows.
The study sought to establish the factors determining the financial performances of microfinance institution in wolaitasodo city. Based on primary data analyzed and presented results in chapter four, various factors determine the level of financial performance of this institution to differing level. According to these identified factors all identified factors influences the financial performance and growth of microfinance institution with a response mean of 1.4 for real interest rates, 1.3 for leverage level, existence of microfinance markets, risk management level, corporate governance provision, 1.2 for outreach or existence of branches, 1.1 for educational level of citizens,administrative costs, profitability, liquidity level of institution, inflation rates and response mean of 1.0 for level of income for citizens.
Table 5.28. Descriptive Statistics
N Minimum Maximum Mean Std. Deviation
Is real interest rates affects the financial performance of microfinance institution 38 1.00 2.00 1.4474 .50390
Is leverage level of institutions affects the financial performance of microfinance institution 38 1.00 2.00 1.3684 .48885
Is existence of microfinance market affects the financial performance of microfinance institution 38 1.00 2.00 1.3684 .48885
Is risk management level of institution affects the financial performance of microfinance institution 38 1.00 2.00 1.3158 .47107
Is corporate governance provision affects the financial performance of microfinance institution 38 1.00 5.00 1.2895 .73182
Is outreach or existence of branches affects the financial performance of microfinance institution 38 1.00 2.00 1.2632 .44626
Is education level of citizens affects the financial performance of microfinance institution 38 1.00 2.00 1.1842 .39286
Is administrative costs affects the financial performance of microfinance institution 38 1.00 2.00 1.1842 .39286
Is profitability of institution affects the financial performance of microfinance institution 38 1.00 2.00 1.1579 .36954
Is liquidity level of institution affects the financial performance of microfinance institution 38 1.00 2.00 1.1316 .34257
Is inflation rates affects the financial performance of microfinance institution 38 1.00 2.00 1.1316 .34257
Is level of income to citizens affects the financial performance of microfinance institution 38 1.00 2.00 1.0789 .27328
Valid N (list wise) 38

The objective of the paper was designed to examine the determinants of firm’s financial performances of microfinance institution in Ethiopia, more especially in case of damota branch omo microfinance institution in wolaitasodo city. The regression results revealed statistically significant relationship between firms return on asset (ROA) and firms financial performance. all other variables equally, show statistical positive significant effect on financial performance except number of active borrowers holds major parts according to primary data analysis.
Based on descriptive and empirical evidence obtained from econometric results, researcher found the size or total asset, operational efficiency, capital structure, capital adequacy, number of borrowers or outreach, and age of firm generally indamota branch omo microfinance is averagely generating positive ROA, indicating that it is not only focused on poverty reduction, but also on its profit orientation.

5.3. Conclusions
From the study finding, the following finding may be noted that there is relationship between microfinance institution financial performances and the explanatory determinant variables considered in the study namely; inflation rates, corporate governance, outreach, profitability, real interest rates, leverage level of institution, educational level of citizens, levels of citizens income, liquidity of institution, administrative costs like communication costs, overheads, existence of microfinance markets like community saving likeidir,ikub, and risk management practices of institution. since some of these factors are environmentally influenced and microfinance institution seeks to attain improved performances should concentrate on the firm specific factors by influencing them to motivate profitability and consequently growth of microfinance institution.
Therefore, the researcher has drawn several concussions from the relationship of major independent variables and dependent variables in order to scale up and indicated which determining factors are best for financial performances to ensure growth.
Firstly, it is concluded that though capital structure is not a major key component in enhancing the performance of damota branch omo microfinance institution, the specified institution must strive to enhance and stabilize their capital structure in order to enhance their financial performance.
Secondly, researcher concluded that although there is evidence of attempts to stabilize and enhance capital adequacy, damota branch omo microfinance institution still face shortages in acquiring sufficient capital. Moreover, capital adequacy would positively influence performances of microfinance institution, and as such it is paramount that that microfinance institution continuously sources for capital if their performance is sustained, sustainable capital adequacy drive to the sustainable financial performance.
Thirdly,a key and great factor of success for conventional retail banks is getting enough customers. This is equally considered as a key factor for MFI’s. Therefore, institution must scale up financial performance and catch up enough numbers of borrowers.
Fourthly, it is concluded that in order to enhance performances of microfinance institution, the institution must work towards increasing and sustaining higher numbers of borrowers since one of key major sources of financing in microfinance institution is interest on loans. Furthermore, active borrowers would enhance net income and also maintain account balances that would go towards enhancing capital sufficiency.
Fifthly, the institution must check and ensure overall strategic issues, operational issues, marketing issues and regulatory framework in order to make operational efficiency and institutional efficiency effective.
Finally, the study established a very strong positive and negative relationship between capital adequacy of firm, numbers of active borrowers of firm, firm size or total asset of firm, operational efficiency and age of firm should be managed carefully that minimize or maximizes service delivery dead lock which made customers determine financial performance of microfinance institution.
5.4. Recommendations
Based on the finding of the research, researcher has recommended certain points what he thought to be very critical if considered and implemented by the microfinance institution accordingly and properly. Therefore, the following recommendations have been given.
• For improved growth in this institution and for its impacts on economy, the stakeholders should work on improving necessary determining factors mentioned in specific study areas.
• Since the microfinance institution in Ethiopia is in its infant age, the government should avail different facilities or infrastructure to reduce inefficiencies.
• Government and policy makers should give due attention for transforming work of institution from manual to computerized system as well as should build institution by skilled human resources.
• The study recommends that microfinance institution need to increase their performance(profitability) there is need from institution to increase size by increasing various aspects of customer base, net assets, deposits, capital adequacy and overall operational efficiency.
• The microfinance institution management should give great attention to reduce operating costs and risk management by deploying technologies which can minimize communication costs and unexpected manual document errors.
• Finally, financial performance affected by very many variables like corporate governance, management quality, administrative costs and both micro and macroeconomic factors. Therefore, need for similar studies carried out with riskiness measured by variables like capital structure, capital adequacy ratio, liquidity level, leverage level and asset quality.
5.5. Limitations of the study
The study captured and concentrated on one MFI regulated by government. There are a number of MFI which are regulated by private business stakeholders that the study not included. Some of respondents took long time to respond due to their busy work schedule and institution uses every daily work by manually that made research difficult in-order to get secondary data at anticipated time.
A lot of persuasion needed to get balance sheet and final financial statement report in-order to decode and analyze secondary data.
5.6. Suggestions for further research
On further research, the study recommends that there is need to replicate the study to involve more microfinance institution especially one that are not regulated by governments and related issues in comparative analysis should be undertaken.
The current study based on descriptive research analysis and uses short time period so that, future studies should be undertaken through case studies for a longer time period in order to find out significant and insignificant variables clearly.
Based on available data, future studies on firm’s financial performance should include additional explanatory variables as well as enlargement of population in way that involves cross institution analysis.

Appendix I
WOLAITA SODOUNIVERSITY
Determinants of Financial Performance of Microfinance Institutions in Ethiopia (A Case Study of Damota Branch Omo Microfinance Institution in WolaitaSodo City).
Dear Respondent,
This questionnaire is designed to collect information on “the determinants of financial performance of microfinance institution in Ethiopia” specifically Damota Branch Omo Microfinance institution in WolaitaSodo City.
This study is being done for academic purpose only that is for a project research paper in partial fulfillment of requirements for the degree of the master of Accounting and Finance. I promise that the information given in the questionnaire will be treated with utmost confidentiality and at no time will your name be mentioned in this research paper. Furthermore, your valuable information helps me for conducting my research topic mentioned above and Your assistance in facilitating this research will be highly appreciated.For more information, call me @ +251913838323
Please tick ? or fill in as appropriately. (6 pages).
Part one.Demographic Information
1. Gender A Male B Female
2. Level of education A Diploma B degree C second degree D above second degree
3. Work experience in the Damota branch omo microfinance institution
A 1-2 years B 3-6 years C 5-10 years D more than 10 years
4. Your work position in omo micro-finance institution is ———————————————
Part Two. Determinants of financial performance of microfinance institution in Ethiopia specially Damota branch omo microfinance institution in Wolaitasodo city are listed below. After you read each of this factors, evaluate them in relation to your Damota branch omo microfinance institution experience and then put a tick ? mark under the choices below.
Strongly agree (5) agree (4) undecided (3) disagree (2) strongly disagree (1)

S/N
Determining factor Agreement Scale
Remark
1 2 3 4 5
1 Capital structure
2 Capital adequacy
3 Operational efficiency
4 Size of MFI(Total asset)
5 Number of borrowers(outreach)
6 Branch existence and networking with branches

Part Three. Factors that affect financial performance of Damota branch omo microfinance institution
1. In your opinion, do the following factors that affect the financial performance of your institution. (tick appropriately) or say Yes or No within respective column.

S/N
Determining factor Response
Remark
Yes No
1 Inflation rates
2 Real interest rates
3 Level of income to citizens
4 Administrative costs
5 Education level of citizens
6 Liquidity level of institution
7 Leverage level of institution
8 Existence of MF market
9 Outreach (branch)
10 Risk management level of institution
11 Profitability of institution
12 Corporate governance provision

Part Four. Major determinants of financial performance of MFI in Ethiopia specifically in Damota branch omo microfinance institution are listed below. After you read each of this major determinants, please, evaluate them in relation to your Damota branch omo microfinance institution experience and put tick ? mark with respective number for the sub part A, B, C, D ; E.
Strongly agree (5) agree (4) undecided (3) disagree (2) strongly disagree (1)

A) Capital structure and financial performance of microfinance institution

S/N
Major determinants Agreement Scale

Remark
1 2 3 4 5
1 Financing in your MF is mainly out of long term debts.
2 Long term debts have positive effects on outreach programs in your microfinance institution.
3 Short term debts have positive effects on outreach programs in your MFI.
4 There is difficulty in accessing long term debts in your MFI.
5 The cost of risk of the debt financing is very high thus affecting financial performance of the institution
6 Capital structure therefore has enhanced the performance of the institution (firm).

B) Capital adequacy and financial performance of Damota branch omo microfinance institution.

S/N
Major determinants Agreement Scale
Remark
1 2 3 4 5
1 Your MFI has sufficient capital to cover default in the loan portfolio
2 Capital adequacy, affect client attitude ; reduced unfair market segmentation as well as it influence your lending practices in your MFI.
3 Capital adequacy has enhanced our outreach to the most optimal level
4 Capital adequacy therefore has enhanced financial performance of our MFI.

C) Branch existence and financial performance of Damota branch omo microfinance institution

S/N
Major determinants Agreement Scale

Remark
1 2 3 4 5
1 Branch existence(diversification) has influenced the financial performance of your MFI to a great extent
2 Increase in number of branches assisted in increasing of the outreach as well as services offered to the clients.
3 Establishing branches close to the urban areas to serve the poor will enhance the service delivery and increase number of customers.
4 Increase in branch will led to an increase in number of active accounts
5 Branch existence and networking therefore enhance the financial performance of the institution (firm).

D) Number of borrowers and financial performance of microfinance institution

S/N
Major determinants Agreement Scale

Remark
1 2 3 4 5
1 The number of active borrower affects the financial performance of MFI.
2 There has been a significant increase in the number of active borrowers in your MFI.
3 The main source of financing in MFI is from interest on active loan borrowers
4 Your MFI has worked hard to address the issue of client trust, thus reducing the transaction costs and improve repayment rates
5 Your MFI has enhanced transparency and thus has given voice to its clients which enhances client loyalty and commitment
6 Number of borrowers therefore has enhanced financial performance of microfinance institution

E) Operation efficiency and financial performance of microfinance institution.

S/N
Major determinants Agreement Scale

Remark
1 2 3 4 5
1 Capital structure has increased the financial performance of your microfinance institution
2 Capital adequacy has made our firm invest more resources on our clients
3 Number of borrowers have increased the financial performance of your microfinance institution
4 Increasing firm size had increased the financial performance of your microfinance institution
5 Increasing the numbers of years incorporated(maturity) increased financial performance of firm

5. What are the main financial performance indicators in your institution?———————————————————————————————————————————————————————————————————————————————————————————————————-
6. What are the strengths and weaknesses of financial performance in your institution with respect to satisfying the customers and stakeholders?
Strengths————————————————————————————————————————————————————————————
Weaknesses———————————————————————————————————————————————————————————
? Thank you in advance for your kindly co-operation!
Appendix II
Figure 1:Raw data used for analysis (source: damota branch omo MFI)

Appendix III
Table 4.27. Collinearity analysis
Model Beta In T Sig. Partial Correlation Collinearity Statistics
Tolerance VIF Minimum Tolerance
OE -.172b -1.088 .390 -.610 .945 1.058 .945
CAR -.187b -1.313 .320 -.680 .992 1.008 .992
CSR -.432b -3.740 .065 -.935 .352 2.843 .352
AGE -.270b -4.903 .039 -.961 .953 1.049 .953
NB -.254b -2.971 .097 -.903 .951 1.052 .951
OE -.042c -.513 .698 -.457 .688 1.454 .688
CAR .147c 12.051 .053 .997 .264 3.781 .254
CSR 1.027c 1.242 .432 .779 .003 301.811 .003
NB .045c .176 .889 .173 .084 11.852 .084
a. Dependent Variable: ROA b. Predictors in the Model: (Constant), FS

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Katsushi. S. Imani, RaghanGaiha and Ganesh Thapa (2011). performance of MFIs stated that the efficiency of a MFI analyzed by both its personnel cost as well as its administration cost (2011, p8).
Joergensen (2011) &Dissanayake (2012), Debt/Equity is a statistically an insignificant predictor variable for the model at 5% level.
Ongore&Gemechu (2013), The performance of management is often expressed qualitatively through subjective evaluation of management systems, organizational discipline, control systems, quality of staff, and others.
Harmes et al, (2008), mersland&strom (2009); Ganka, (2010); It is generally assumed that the larger the numbers of the borrowers the better the financial performances of the microfinance institutions.
NimalSanderatne (2003) cited by Dissanayake (2012), study of the determinants of financial viability showed that operational efficiency and low administration costs have an important bearing on the Financial performance of MFIs
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Wambugu and Ngugi (2012), factors influencing financial sustainability of microfinance institutions in Ethiopia found, a correlation between capital structure and financial sustainability of microfinance institutions.
(Harmes et al, 2008, mersland&strom, 2009; Ganka, 2010); The larger numbers of the borrowers the better the financial performances of the microfinance institutions.
Jorgensen, (2011), The age of microfinance institution has positive impact on profitability of MFI measured by microfinances dual objectives of financial sustainability and outreach, Pp. 97.

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