Profitability Determinants of Nepalese Microfinance Institutions: A Panel Data Analysis from the Institutionalist Paradigm

<ns3:p>Background Microfinance Institutions (MFIs) primarily channel rural savings through microloans for individuals and small entrepreneurs, which helps to alleviate poverty, considered a major social challenge. The financial stability and sustainability of MFIs primarily depend on profitability. Methods This study empirically investigates the determinants of profitability as measured by ROA and ROE in Nepalese MFIs. The secondary data are acquired from the Nepal Rastra Bank (NRB) for the period 2078Q2 to 2081Q4 [Nepali Calendar Date] of 49 MFIs, leading to a total of 735 observations. This study employs the Fixed-effect (FE) estimator for baseline regression analysis and the POLS and Random-effect (RE) estimators for sensitivity analysis. Results The outcome reveals that both capital ratios—core capital and capital fund—boost profitability in Nepalese MFIs. Also, the earnings assets, such as loans, boost the profitability of MFIs. Conversely, borrowing and cash reserve ratio (CRR) do not impact the profitability of Nepalese MFIs. However, loans to the agriculture sector adversely impact profitability in the Nepalese MFIs. Notably, nonperforming loans (NPL) adversely affect the profitability. Conclusions This study concludes that capital, loans, and NPL are the major determinants of the profitability of Nepalese MFIs. Policymakers could encourage MFIs to strengthen their capital base, implement stricter credit management monitoring policies, and implement a credit guarantee scheme to protect MFIs from eroding profitability and to develop the agriculture sector. Contribution/Originality This study contributes novel empirical evidence to the discourse on Nepalese MFIs by examining the determinants of profitability through the lens of the institutionalist paradigm. This study area has received less attention in earlier studies, especially in the Nepalese context, which fills the research void and supplies additional literature in this field.</ns3:p>