Factors determining profitability of Microfinance institutions in Rwanda

Abstract

In recognition that profitability is a necessary condition for microfinance institutions to scale up to a level that allows them to provide microfinance services to a large client base independent of external subsidies over the long run, this study investigates and documents the factors that determine the profitability of MFIs in Rwanda. We have used aggregated data of MFIs in the country over a period of 7years from Q4, 2014 to Q3, 2020 collected from the Central Bank of Rwanda. The research applied ordinary least squares to an analysis of multiple correlation and regression consisting of aggregated data for Rwandan MFIs to identify the dynamics that determine profitability of MFIs in Rwanda and the extent to which the identified factors explain the profitability. The study found that Capital Adequacy, portfolio yield, operating expense and GDP have a positive relationship with the profitability of MFIs in Rwanda while financial expense, provision expense, gross loan book to total assets and inflation have a negative correlation with the profitability of MFIs in Rwanda. From the findings, three recommendations were formulated: To put in place a good loan management policy and appraisal system, strive to improve the level of investment in the expenses driving income and bring these to the optimal levels such as technology, training, marketing, personnel expenses just to name a few and the government to support MFIs in matter related to computerization and continue close supervision for their development.