Risk and return analysis on common stock investment of microfinance institution in Nepal

Abstract

The main objectives of this study are to examining the impact of risk factors on the profitability of microfinance institutions in Nepal. The descriptive and causal research design has been adopted for the study. The study used secondary data from five microfinance companies for ten years i.e., 2013/2014 to 2022/2023 data has been analyzing by using different statistical tools. Data is received from the annual reports of selected microfinance institution’s websites. ROA and ROE is taken as an indicator of the profitability of microfinance institutions whereas, liquidity risk, credit risk, operation risk and market risk are taken as risk factors. SPSS version 27.0 software was used to analyze the data. In the regression analysis, there is a 0.408 R-value. R square, a coefficient to determination, stood at 0.167, which reflects that about 16.7 % of the systematic variation on return on asset (ROA) can explained by predictors and the remaining is due to the effect of the other factors. The R square was discovered to be 0.159. that indicates that the model has been explained. The predictors account for 15.9% of the variance in the dependent variable (ROE). The coefficient of LDR and DTA is 0.022 and 0.140 respectively and the p-value is 0.386 and 0.307 respectively, representing there is a positive but not statistically significant impact on return on assets by LDR and DTA. The return on assets is negatively but not statistically significantly influenced by the NPLs, OER and INTR. The impact of the capital adequacy ratio on ROA is positive and insignificant with a slope 0.556 (P = 0.556> 0.05). The coefficient of LDR and DTA is 0.047 and 0.577 respectively and the pvalue is 0.788 and 0.548 respectively, representing there is a positive but not statistically significant impact on return on assets by LDR and DTA. The NPLs have a negative coefficient i.e. -0.197 and the p-value is lower than the level of significance i.e. 0.05> 0.041. The OER, INTR and CAR have a negative coefficient i.e. -0.292, -1.182 and -0.545 respectively. This means that the return on assets is negatively but not statistically significantly influenced by the OER, INTR and CAR.

Keywords: Risk factors, Return on assets, Return on Equity, Microfinance Institutions, Correlation coefficient, Risk management