FACTOR INFLUENCING THE FINANCIAL SUSTAINABILITY OF MICROFINANCE INSTITUTION IN NEPAL

Abstract

This study investigates and analyze the relationship and effects of the operating expense ratio, number of active borrowers, return on assets, return on equity, age of MFIs, and debt-to-equity ratio on the financial sustainability of microfinance institutions in Nepal, over the period from 2013/14 to 2022/23. The research focuses on variables such as the Operating Expense Ratio (OER), Number of Active Borrowers (NAB), Return on Assets (ROA), Return on Equity (ROE), Age of MFIs (AGE), and Debt-to-Equity Ratio (DER), with Financial Self-Sufficiency (FSS) serving as the dependent variable. Utilizing descriptive and causal-comparative research designs, the study employs descriptive statistics, correlation analysis, and regression analysis to explore how these factors influence the financial sustainability of MFIs. The findings show a significant negative correlation between OER and FSS, indicating that higher operating expenses reduce financial self-sufficiency. In contrast, ROA has a strong positive correlation with FSS, highlighting the importance of returns on assets. NAB and ROE are positively correlated with FSS but have weaker impacts, while AGE and DER show minimal influence on financial self-sufficiency. The regression analysis reveals that OER has a significant negative impact on FSS (β = -0.023, p = .001), indicating that higher operating expenses reduce financial self-sufficiency. ROA shows a significant positive effect (β = 0.081, p = .002), emphasizing the importance of asset returns. NAB also has a small but significant positive impact (β = 8.289E-7, p = .024), suggesting that more active borrowers slightly enhance FSS. AGE negatively impacts FSS (β = -0.013, p = .002), indicating that older MFIs may experience declining financial sustainability. However, ROE (β = 0.005, p = .091) and DER (β = -0.015, p = .167) do not significantly affect FSS. The model explains 77% of the variability in FSS, highlighting the importance of managing expenses and optimizing returns to ensure financial sustainability.