ABSTRACT:

The data were analyzed with autoregressive distributed lag (ARDL) framework and the properties of panel data were checked with normality tests and panel unit root tests. The results shows that the coefficient of number of active borrowers and percentage of female borrowers are negative and significant (p>0.05) in explaining profitability of microfinance institutions. The coefficient of debtequity is positive and significant is (p>0.05) in explaining profitability of microfinance institutions. Moreover, the error correction term coefficient is signifying that short-run disturbance is adjusted in the long-run and the results suggest the existence of a rebound effect. This study recommends financially sustainable microfinance bank expansion in order to serving its social goals at an acceptable credit risk level. The professionalization of microfinance should be considered as a complementary way of providing financial services to the excluded portion of population, the remote and inaccessible sections of the country.