IMPACT OF MERGERS AND ACQUISITIONS ON FINANCIAL PERFORMANCE: EVIDENCE FROM THE MICROFINANCE INDUSTRY OF NEPAL A Research Dissertation Submitted to Kathmandu University School of Management in partial fulfillment of the requirement for the Degree of Master of Philosophy (MPhil) in Management Krishna Hari Baral KU Registration No. 014076-12 Kathmandu Nepal March, 2026

Abstract

This study examines the impact of mergers and acquisitions (M&As) on the financial performance of microfinance institutions (MFIs) in Nepal. Minimum paid-up capital requirement limit set by Nepal Rastra Bank (NRB), which prompted M&As among MFIs, is the policy event for this research. M&As among MFIs increased highly after 2020Q1. The research uses a quasi-experimental research design, under a natural setting, and a Difference-in-Differences (DiD) fixed-effects model for estimation. A quarterly unbalanced panel dataset from 2017Q3 to 2024Q4 is used. Secondary data are sourced from NRB reports, audited financial statements of MFIs, and other official sources. The sample contains 60 MFIs with 1,621 observations, after dropping four wholesale MFIs. Financial performance is measured using profitability (ROA and ROE), efficiency & productivity (loan portfolio per staff), sustainability (debt-to-equity ratio), and loan portfolio specific growth (loan portfolio growth and borrower growth). The DiD model controls for age, inflation, interest rates, remittance, and the COVID-19 shock. The study uses descriptive and correlation analysis, tests of parallel trends, model selection tests, and post-estimation checks. Heteroskedasticity, serial correlation, and cross-sectional dependence are handled using Driscoll-Kraay standard errors. The findings show that M&As significantly improve profitability, efficiency & productivity, and financial sustainability of merged MFIs, but the impact on loan growth and outreach is insignificant. These results support the efficiency theory of M&As, which says that M&As create benefits through synergy effects, which in this study are reflected in improved financial performance. The main limitation of the study is the difference in the timing of mergers across MFIs.