The Determinants of Microfinance Profitability: Evidences from Sri Lankan Microfinance Institutions

Abstract

This study was undertaken with the objective of asserting the significant determinants of microfinance profitability in Sri Lankan microfinance institutions. This study is based on eleven microfinance institutions in Sri Lanka, within the period of 2005- 2010, which are practicing microfinance at present. In this study, profitability is measured by profitability and sustainability ratios. Determinants of microfinance profitability are measured by efficiency and productivity, financing structure and portfolio quality ratios. Profitability is measured by return on equity ratio, return on assets ratio, and profit margin ratio. Sustainability is measured by operational self sufficiency ratio. Efficiency and productivity are measured by operating expense ratio, personal productivity ratio and cost per borrower ratio. Financing structure is measured by debt/equity ratio. Portfolio quality is measured by writeoff ratio. Finally, the researcher intends to postulate that, the cost per borrower is a determinant for return on equity and operational self sufficiency. Besides, the operating expense ratio and write off ratios are determinants of return on equity, return on assets and profit margin. Observations of the debt/equity variable of the study imply causality for the return on assets and operational self sufficiency as a determinant of respective models.