{"status":"ok","message-type":"work","message-version":"1.0.0","message":{"indexed":{"date-parts":[[2026,9,29]],"date-time":"2026-09-29T09:59:14Z","timestamp":1790675954027,"version":"4.1.0"},"update-to":[{"DOI":"10.12688\/f1000research.178815.1","type":"new_version","label":"New version","source":"publisher","updated":{"date-parts":[[2026,5,28]],"date-time":"2026-05-28T00:00:00Z","timestamp":1779926400000}}],"reference-count":33,"publisher":"F1000 Research Ltd","license":[{"start":{"date-parts":[[2026,5,28]],"date-time":"2026-05-28T00:00:00Z","timestamp":1779926400000},"content-version":"tdm","delay-in-days":0,"URL":"https:\/\/creativecommons.org\/licenses\/by\/4.0\/"}],"funder":[{"name":"Self funding"}],"content-domain":{"domain":["f1000research.com"],"crossmark-restriction":false},"short-container-title":["F1000Res"],"abstract":"<ns3:p>Background 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). Methods 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. Results 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. Conclusion 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.<\/ns3:p>","DOI":"10.12688\/f1000research.178815.2","type":"journal-article","created":{"date-parts":[[2026,6,8]],"date-time":"2026-06-08T04:34:05Z","timestamp":1780893245000},"page":"447","update-policy":"https:\/\/doi.org\/10.12688\/f1000research.crossmark-policy","source":"Crossref","is-referenced-by-count":0,"title":["Impact of Capital Adequacy on the Profitability of Microfinance Institutions in Nepal"],"prefix":"10.12688","volume":"15","author":[{"given":"Basu Dev","family":"Lamichhane","sequence":"first","affiliation":[{"name":"Saraswati Multiple Campus Kathmandu Tribhuvan University"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Satyanarayan","family":"Choudhary","sequence":"additional","affiliation":[{"name":"Saraswati Multiple Campus Kathmandu Tribhuvan University"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"ORCID":"https:\/\/orcid.org\/0000-0002-0728-1226","authenticated-orcid":false,"given":"Bharat Ram","family":"Dhungana","sequence":"additional","affiliation":[{"name":"School of Business Pokhara Pokhara University"}],"role":[{"vocabulary":"crossref","role":"author"}]},{"given":"Manika","family":"Shrestha","sequence":"additional","affiliation":[{"name":"Kathmandu Freelance Researcher"}],"role":[{"vocabulary":"crossref","role":"author"}]}],"member":"2560","published-online":{"date-parts":[[2026,5,28]]},"reference":[{"key":"ref1","first-page":"248-264","article-title":"Financial durability and outreach of microfinance institutions in Ethiopia: Does organizational form matter?","volume":"5","author":"G Abate","year":"2014","journal-title":"J. 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We have revised our title based on our research findings, and now our research paper title is \n<i>Capital Adequacy as a Driver of Profitability: Panel Evidence from Nepalese Wholesale and Retail Microfinance Institutions<\/i>. We appreciate the time and effort you and the reviewers dedicated to providing feedback on our manuscript, and we are grateful for the insightful comments and valuable improvements to our paper. We have incorporated all the reviewers' suggestions to the fullest extent. We are grateful to the anonymous reviewers of our manuscript. Please find below the response sheet for the reviewers' and the editor's perusal.&nbsp; We have submitted the revised manuscript after incorporating all valuable and insightful feedback. Thank you. \n<b>Comment 1:&nbsp;<\/b>In the regression equation, the authors simultaneously included Core Capital Ratio (CCR), Supplementary Capital Ratio (SCR), and Capital Adequacy Ratio (CAR) as independent variables.&nbsp;From a financial perspective, CAR is essentially the sum of Tier 1 capital (equivalent to CCR) and Tier 2 capital (equivalent to SCR). Including both the components and their sum in the same model inevitably leads to perfect or near-perfect multicollinearity.&nbsp;The correlation matrix in Table 3 itself demonstrates a very high correlation between CAR and CCR (r=0.697). Although in the latter part of the paper (Table 12), the authors removed CCR and SCR to retain only CAR, presenting a series of models and tables (from Table 4 to Table 9) based on a model with severe multicollinearity is unreasonable and diminishes the integrity of the scientific paper. \n<b>Author(s) response to comment 1:&nbsp;<\/b>Thank you for your valuable feedback. We are now happy with your suggestion and have modified the model. We have drastically revised the paper, addressed all issues, and incorporated them. \n<i>Profitability=<\/i>\n<i>\u03b2<\/i>\n<i>0<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>1<\/i>CAR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>2<\/i>LR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>3<\/i>SIZE\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>4<\/i>GDPgr\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>5<\/i>INF\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>6<\/i>TYPE\n<i>i<\/i>\n<i>+<\/i>\n<i>&micro;<\/i>\n<i>t<\/i>\n<i>+<\/i>\n<i>\u03c9<\/i>\n<i>i<\/i>\n<i>+<\/i>\n<i>\u03b5<\/i>\n<i>it<\/i> Where, Profitability is measured in the form of ROE (Return on equity) and ROA (Return on assets) CAR = Capital adequacy ratio LR = Leverage ratio SIZE = Institutional size in terms of the log of total assets GDPgr = The growth rate of gross domestic product INF= Inflation rate TYPE = Types of microfinance institutions: 0 Retail and 1 Wholesale We appreciate your rigorous review. \n<b>Comment 2:&nbsp;<\/b>The dataset utilized is panel data, comprising 10 microfinance institutions observed over a 10-year period, yielding 100 observations.&nbsp;However, the initial results (Tables 4 through 9) appear to employ the Pooled Ordinary Least Squares (Pooled OLS) method. Ignoring the unique, time-invariant characteristics of each institution over time in a Pooled OLS model leads to biased results.&nbsp;Furthermore, the absence of pre-regression statistical diagnostic tests (such as tests for normality, heteroskedasticity, autocorrelation, and unit roots) compromises the reliability of the estimates. \n<b>Author(s) response to comment 2:&nbsp;<\/b>Thank you for your remarkable suggestions. We have addressed them. \n<b>Model 1: ROE<\/b> \u0394ROE\n<i>it<\/i>\n<i>=<\/i>\n<i>\u03b2<\/i>\n<i>0<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>1<\/i>CAR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>2<\/i>LR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>3<\/i>SIZE\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>4<\/i>GDPgr\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>5<\/i>INF\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>6<\/i>TYPE\n<i>i<\/i>\n<i>+<\/i>\n<i>&micro;<\/i>\n<i>t<\/i>\n<i>+<\/i>\n<i>\u03c9<\/i>\n<i>i<\/i>\n<i>+<\/i>\n<i>\u03b5<\/i>\n<i>it<\/i> \n<b>Model 2: ROA<\/b> ROA\n<i>it<\/i>\n<i>=<\/i>\n<i>\u03b2<\/i>\n<i>0<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>1<\/i>CAR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>2<\/i>LR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>3<\/i>SIZE\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>4<\/i>GDPgr\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>5<\/i>INF\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>6<\/i>TYPE\n<i>i<\/i>\n<i>+<\/i>\n<i>&micro;<\/i>\n<i>t<\/i>\n<i>+<\/i>\n<i>\u03c9<\/i>\n<i>i<\/i>\n<i>+<\/i>\n<i>\u03b5<\/i>\n<i>it<\/i>  As per your suggestion, we have used both FE and RE models together with the Hausman test, according to the results presented above.  \n<b>Comment 3:&nbsp;<\/b>The research framework (Figure 1) and the regression models are completely devoid of control variables.&nbsp;The results indicate an adjusted R-square of only 0.279 for the dependent variable ROA and 0.264 for ROE. This implies that approximately 70% of the variance in profitability remains unexplained by the current model.&nbsp;To meet standard econometric benchmarks, the authors must incorporate basic&nbsp;control variables such as institutional size (Log of Total Assets), growth rate, or macroeconomic factors (GDP growth, inflation), which are highly critical in the Nepalese market. The authors themselves acknowledged this deficiency in the conclusion section of the paper. \n<b>Author(s) response to comment 3:&nbsp;<\/b>Thank you for your valuable feedback. We agree with your suggestion. We added variables as per your feedback and developed a new model. \n<i>Profitability=<\/i>\n<i>\u03b2<\/i>\n<i>0<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>1<\/i>CAR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>2<\/i>LR\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>3<\/i>SIZE\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>4<\/i>GDPgr\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>5<\/i>INF\n<i>it<\/i>\n<i>+<\/i>\n<i>\u03b2<\/i>\n<i>6<\/i>TYPE\n<i>i<\/i>\n<i>+<\/i>\n<i>&micro;<\/i>\n<i>t<\/i>\n<i>+<\/i>\n<i>\u03c9<\/i>\n<i>i<\/i>\n<i>+<\/i>\n<i>\u03b5<\/i>\n<i>it<\/i> \n<b>Comment 4:&nbsp;<\/b>In the literature review and methodology sections, the authors emphasize filling the research gap by distinguishing between wholesale (30% of the sample) and retail (70% of the sample) microfinance institutions.&nbsp;Nevertheless, in the entirety of the quantitative analysis, the data from these two groups are aggregated without any differentiation.&nbsp;To properly address the stated gap, the authors should have utilized a dummy variable (e.g., 1 for wholesale, 0 for retail) or conducted separate regressions to compare the impact of capital adequacy on these specific business models. \n<b>Author(s) response to comment 4:&nbsp;<\/b>Thank you for your valuable feedback. We agree with your suggestion. We again collected data, added the TYPE variable (Type of MFIs, i.e., wholesale and retail), and analyzed it. Our main findings are related to the type of MFIs. As per our findings, we also modified our title. We are grateful to you for your insightful comments.","URL":"https:\/\/f1000research.com\/articles\/15-447\/v2#referee-comment-17176","order":1,"name":"referee-comment-17176","label":"Referee Comment","group":{"name":"article-reports","label":"Article Reports"}},{"value":"10.5256\/f1000research.201893.r489130, Olcay \u00d6l\u00e7en, Istanbul Gelisim University, Istanbul, 01 Jul 2026, version 2, indexed","URL":"https:\/\/f1000research.com\/articles\/15-447\/v2#referee-response-489130","order":2,"name":"referee-response-489130","label":"Referee Report","group":{"name":"article-reports","label":"Article Reports"}},{"value":"10.5256\/f1000research.201893.r497295, Margaret Kosgei, Dr Vincent Shiundu, Kenyatta University, Nairobi, 14 Aug 2026, version 2, indexed","URL":"https:\/\/f1000research.com\/articles\/15-447\/v2#referee-response-497295","order":3,"name":"referee-response-497295","label":"Referee Report","group":{"name":"article-reports","label":"Article Reports"}},{"value":"10.5256\/f1000research.201893.r510153, Lilian Gumbo, University of South Africa, Pretoria, 22 Sep 2026, version 2, indexed","URL":"https:\/\/f1000research.com\/articles\/15-447\/v2#referee-response-510153","order":4,"name":"referee-response-510153","label":"Referee Report","group":{"name":"article-reports","label":"Article Reports"}},{"value":"The author(s) declared that no grants were involved in supporting this work","order":5,"name":"grant-information","label":"Grant Information"},{"value":"This is an open access article distributed under the terms of the Creative Commons Attribution Licence, which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.","order":0,"name":"copyright-info","label":"Copyright"}]}}