Determinant Factors In Credit Risk Management of Microfinance Institutions In Ethiopia
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.