Factor affecting profitability of microfinance companies in Nepal

Abstract

The main purpose of the study is to examine the impact of factor affecting profitability of icrofinance companies in Nepal for ten year periods from 2012/13 to 2021/22. This study used descriptive, correlation and multiple regression analysis to analyze the data. This study shows that the NUBL has the strongest profitability position in terms of ROA and ROE. NUBL could manage their overall operations and the best or most effective management in earning profit among the sample companies. The correlation analysis shows that liquidity ratio and capital adequacy ratio have significant negative relationship with profitability (ROA and ROE). At the meantime, non-performing loan and operating efficiency ratio have insignificant negative relationship with ROA and significant negative relationship with ROE. Moreover, size of companies has significant positive relationship with profitability (ROA and ROE) of microfinance companies in Nepal. The multiple regression analysis reveals that liquidity ratio has significant negative impact on ROA and insignificant negative impact on ROE. However, capital adequacy ratio has insignificant positive impact on ROA and significant positive impact on ROE. At the same time, non-performing loan and operating efficiency ratio have significant negative impact on profitability (ROA and ROE) of the microfinance companies. Moreover, size of companies has significant positive impact on profitability of the microfinance companies. Therefore, this study concluded that liquidity, nonperforming loan, operating efficiency ratio and size of companies are the key factors of profitability of microfinance companies in Nepal.

Keywords: Return on assets, return on equity, capital adequacy ratio, non-performing loan ratio and operating efficiency ratio.