EVALUATING THE ROLE OF OUTREACH IN ENSURING FINANCIAL STABILITY OF MICROFINANCE INSTITUTIONS IN NEPAL

Abstract

This study aims to explore the impact of financial factors on the performance of microfinance institutions in Nepal. Effective liquidity management within these institutions requires a structured approach to decision-making concerning liquidity risk control, including appropriate funding strategies, exposure limits, and emergency liquidity allocation protocols. Liquidity considerations encompass both the public's trust and the firm's daily operations. A lack of sufficient cash or liquidity signals deeper financial issues and crises within the institution, sending a negative message to both individuals and businesses. The variables examined in this study include the debt ratio (DR), firm size (FS), cash reserve ratio (CRR), capital adequacy ratio (CAR), return on assets (ROA), and return on equity (ROE) for microfinance institutions. DR, FS, CRR, and CAR are treated as independent variables, while ROA and ROE serve as dependent variables in the analysis. Secondary data for this research were collected from the annual reports of authorized companies over a span of ten years, from 2070/71 to 2079/80. The data were processed and evaluated using SPSS version 24, employing descriptive, exploratory, and explanatory research methods. A sample of four microfinance companies was selected from a total of 55 through convenience sampling. The companies involved are First Microfinance Laghubitta Bittiya Sanstha Limited, Sana Kisan Bikas Laghubitta Bittiya Sanstha Limited, Gurans Laghubitta Bittiya Sanstha Limited, and RSDC Laghubitta Bittiya Sanstha Limited. This research relies on secondary data, with ordinary least square (OLS) regression being a key method in panel data analysis. There is a significant positive correlation between firm size and ROE, as well as a strong positive relationship between CRR and ROA. However, the cash reserve ratio and debt ratio show little connection to return on equity (ROE). The findings of this study could assist lawmakers and bankers in formulating effective policies to enhance the profitability of the financial sector.