Impact of Capital Adequacy on the Profitability of Microfinance Institutions in Nepal

Capital adequacy is essential for the sustainable operation of microfinance institutions (MFIs). MFIs can expand their outreach to the low-income and marginalized people if the institutions are sustainable. Maintaining adequate capital is important from a regulatory perspective to ensure financial stability and sustainability. The objectives of this study are to examine the impact of capital adequacy on the profitability of Nepalese microfinance institutions (NMFIs).

This study is based on secondary data collected from the annual reports of the selected microfinance institutions. A descriptive and causal comparative research design was used. The study sampled 10 microfinance institutions from 57 purposively. The independent variables were core capital ratio, supplementary capital ratio, cash reserve ratio, capital adequacy ratio, and leverage ratio. The dependent variables were Return on Assets (ROA) and Return on Equity (ROE). The purposive sampling method was used.

The findings of the study revealed that all relationships were positive, except for the leverage ratio, which had a negative relationship with all other variables. The study variables CCR, SCR, CAR, CRR, and LR significantly affect ROA, except LR. Similarly, the dependent variable ROE also has significant impacts on the study variables CCR, SCR, CAR, and CRR, whereas the LR has an insignificant impact on the leverage ratio.

The study brings real acuities to light, as intended by proper executives and governments, leading to a robust economic recovery and ensuring sustainable growth in Nepalese microfinance institutions. Regulators and policymakers may focus on improving the financial and non-financial performance of MFIs, including expanding their outreach to marginalized and rural populations through monetary policy.