A Study on the Drivers of Financial Performance of Microfinance Institutions: A Case of Deposit-Taking Microfinance Institutions in Zambia

Abstract

This research study sought to contribute to the body of existing literature by investigating what drives the financial performance of deposit-taking MFIs (DTMFIs) in Zambia. To accomplish this objective, a quantitative research approach and a longitudinal research design were adopted. Secondary data was based on financial ratios of five DTMFIs licensed by the BoZ, the Herfindahl-Hirschman index, and a macroeconomic variable spanning from 2015 to 2022 with 40 observations in total. Financial performance (proxied by return on assets) was the dependent variable whereas institutional-specified drivers (proxied by capital adequacy and portfolio at risk), macroeconomic variables (proxied by the annual rate of inflation), and market-specified drivers (proxied by market concentration) were independent variables. To analyze the research data, descriptive statistics, correlations, and regression analysis were utilized. Research findings revealed that capital adequacy, portfolio at risk, and inflation are drivers of financial performance in DTMFIs in Zambia. Policymakers and DTMFIs are therefore recommended to ensure that credit personnel are at all times well-trained to assess risks more efficiently and that institutions are engaged in enhancing scenario-based planning to evaluate the probable influence of macroeconomic variables on financial performance. Key words: Deposit-taking Microfinance Institutions, Drivers, Financial Performance,Microcredit, Microfinance, Zambia.