IMPACT OF FINANCIAL INDICATOR ON PROFITABILITY OF MICROFINANCE COMPANIES OF NEPAL

Abstract

The aim of this study is to examine the impact of financial indicators on the profitability of microfinance companies in Nepal. Effective management of liquidity by financial institutions involves adopting frameworks to manage liquidity risk, devising suitable funding strategies, setting exposure limits, and establishing protocols for allocating liquidity during emergencies. Liquidity considerations encompass both public perception and the daily operations of firms. Insufficient cash or inadequate liquidity can convey a negative impression to individuals and businesses about the severity of financial crises and other issues within financial institutions. The study includes various financial metrics such as price-earnings ratio (PER), cash reserve ratio (CRR), total assets (TA), return on assets (ROA), and dividend payout ratio (DPR) for microfinance firms. Secondary data spanning nine years (2070/71 to 2078/79) from annual reports of selected companies was analyzed using SPSS version 24. The research employed a descriptive, exploratory, and explanatory approach. Four microfinance companies were conveniently sampled from a population of sixty-three: First Microfinance Laghubitta Bittiya Sanstha Limited, Sana Kisan Bikas Laghubitta Bittiya Sanstha Limited, Rural Microfinance Development Center Limited, and RSDC Laghubitta Bittiya Sanstha Limited. In this study, secondary data was employed. Ordinary least squares regression (OLS) was utilized as a pivotal analytical tool in panel data analysis. The findings reveal a strong positive correlation between total assets and return on equity (ROE), as well as a significant relationship between capital adequacy ratio (CRR) and return on assets (ROA). However, the cash reserve ratio, dividend payout ratio, and price-earnings ratio show only marginal associations with return on equity (ROE). These conclusions could aid policymakers and financial institutions in formulating effective strategies to enhance profitability within the financial sector.