DETERMINANTS OF PROFITABILITY OF NEPALESE MICROFINANCE COMPANIES

Abstract

This study investigates the profitability metrics of microfinance institutions (MFIs) with a focus on Return on Assets (ROA), Return on Equity (ROE), Book Value Per Share (BVPS), Earnings Per Share (EPS), Net Profit Margin (NPM), Capital Adequacy Ratio (CAR), and Price-Earnings Ratio (P/E Ratio). The research aims to evaluate the current status of these financial ratios, analyze their interrelationships, and examine their impact on profitability performance. Based on secondary data from financial statements of five selected MFIs in Nepal Nirdhan Utthan Laghubitta Sanstha Limited, Chhimek Laghubitta Bittiya Sanstha Limited, Nadep Laghubitta Bittiya Sanstha Limited, Forward Microfinance Laghubitta Bittiya Sanstha Limited, and Sana Kisan Bikash Laghubitta Bittiya Sanstha Limited spanning from fiscal year 2013/14 to 2022/23, the study employs descriptive and causal-comparative research designs. The findings reveal notable consistencies and contrasts in the performance metrics across the sampled MFIs. For instance, Nirdhan and Chhimek displayed consistently high ROA and ROE, indicating efficient asset management and strong shareholder returns. Conversely, Nadep and Sana Kisan exhibited significant variability in their P/E ratios and lower CARs, suggesting inconsistencies in market valuation and higher financial risk. The analysis further highlights that EPS and NPM are strong predictors of ROA and ROE, emphasizing their critical role in driving profitability. However, CAR’s impact on ROE is negative, suggesting that higher capital reserves may dilute equity returns, while BVPS shows a positive but limited influence on ROE. The P/E Ratio’s effect on both ROA and ROE is minimal, indicating that market valuations have a less direct impact on profitability performance. This research underscores the importance of earnings and profit margins in enhancing asset and equity returns, while also noting the varying roles of other financial metrics. The study provides valuable insights into the performance dynamics of MFIs, offering a comprehensive understanding of their financial health and operational efficiency. The results are intended to guide financial management practices and strategic decision-making within the microfinance sector, contributing to improved profitability and sustainability.