Financial analysis of micro finance companies in Nepal

Abstract

This research delves into the financial performance of micro finance limited in Nepal and the factors influencing their profitability. Employing a causal research design, the study investigates cause-and-effect relationships among variables. Out of 59 microfinance organizations in Nepal, a sample of five is chosen using a judgmental sampling approach based on paid-up capital. Financial evaluation is conducted using various instruments including cash reserve ratio (CRR) for liquidity, capital adequacy ratio for capital assessment, non-performing loans for asset quality, and Return on Equity (ROE) and Return on Assets (ROA) for profitability. Statistical methods such as regression analysis and correlation are utilized to compare liquidity, capital, asset quality, and profitability. Regression analysis assesses the impact of capital sufficiency, asset quality, and liquidity on profitability, while correlation analysis gauges the relationships between different variables. Results indicate mixed findings regarding the significance of predictors on profitability and equity returns. Notably, Non-Performing Loan (NPL) ratio and Cash Reserve Ratio (CRR) do not exhibit statistically significant linear relationships with ROA, despite strong standardized coefficients. Similarly, Capital Adequacy Ratio (CAR) and NPL ratio do not show significant linear relationships with ROE. However, a significant positive relationship is found between CRR and ROE, suggesting that maintaining higher cash reserve ratios may enhance equity returns. These findings highlight the intricate nature of factors influencing financial performance in the microfinance sector, emphasizing the potential role of liquidity management in boosting equity returns.