Factors Determining Profitability of Nepalese Microfinance Institutions

Abstract

This research aimed to examine the factors influencing the profitability of microfinance in Nepal. To achieve this goal, the study utilized descriptive and causal-comparative research methods. Panel data spanning nine years (2013/14 to 2021/22) from microfinance companies in Nepal were analyzed. Profitability, measured by indicators like ROA and ROE, was the dependent variable, while independent variables included ratios such as nonperforming loan ratio, cash reserve ratio, Size and equity to assets ratio. Secondary data were employed for this study. Ordinary least squares regression (OLS) was used as the primary analytical tool. The analysis indicates that the Return on Assets (ROA) tends to fluctuate in response to changes in the Non-Performing Loan Ratio (NPLR) or the Cash Reserve Ratio (CRR). The size of the bank, as represented by an independent variable in the table, is found to be statistically significant. Similarly, for Return on Equity (ROE), it tends to vary with changes in CRR and Equity to Assets (ETA), both of which are statistically significant. Although NPLR does not show significance, other factors like bank size and CRR do. This regression model suggests a positive association between ROE and selected independent variables like size and NPLR, while a negative correlation exists with CRR and ETA. These insights could assist bankers and policymakers in improving the profitability of financial institutions. Keywords: Profitability, Commercial Banks, ROE, ROA, Liquidity.