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Determinant Factors In Credit Risk Management Of Microfinance Institutions In Ethiopia

Author

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  • Tehulu, Tilahun Aemiro
  • Abegaz, Tesfaye Molla

Abstract

The purpose of this paper is to empirically identify the factors that affect credit risk of microfinance institutions in Ethiopia where interventions through the delivery of microfinance services are considered as one of the policy instruments of the government to eradicate poverty. This study has identified the determinants of credit risk of microfinance institutions using Morgan Stanley’s rating methodology of microfinance institutions and GLS random effect regression. Given Morgan Stanley’s rating methodology, Ethiopian microfinance institutions had an excellent performance in terms of credit risk management, profitability, operating efficiency, productivity, liquidity, and leverage. However, the size of their gross loan portfolio was very poor during the period under study. In addition, the regression result has revealed that size of portfolio, return on asset, and operating efficiency have negative and significant impact on credit risk. However, productivity, liquidity, leverage, and age have no effect on credit risk. Thus, size of portfolio, return on asset, and operating efficiency are the important variables that account for variation in credit risk among microfinance institutions in Ethiopia.

Suggested Citation

  • Tehulu, Tilahun Aemiro & Abegaz, Tesfaye Molla, 2016. "Determinant Factors In Credit Risk Management Of Microfinance Institutions In Ethiopia," MPRA Paper 129128, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:129128
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    References listed on IDEAS

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    3. Ayi Gavriel Ayayi & Maty Sene, 2010. "What drives microfinance institution's financial sustainability," Journal of Developing Areas, Tennessee State University, College of Business, vol. 44(1), pages 303-324, September.
    4. Vicente Salas & Jesús Saurina, 2002. "Credit Risk in Two Institutional Regimes: Spanish Commercial and Savings Banks," Journal of Financial Services Research, Springer;Western Finance Association, vol. 22(3), pages 203-224, December.
    5. Ayi Gavriel Ayayi, 2012. "Credit risk assessment in the microfinance industry," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 20(1), pages 37-72, January.
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    Keywords

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    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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