The effect of capital structure on microfinance institutions performance

Abstract

This study attempts to identify the effect of capital structure on overall financial performance of micro finance institutions (MFIs). The study used cross sectional data that contained information from 403 MFIs in 73 countries. Multivariate regression analysis was applied in order to get the results. Cost of funds and return on assets were used as measures for the performance of MFIs, and debt to equity and debt to assets were used as measures for the capital structure, in addition to 10 control variables. The findings of the study indicate that most of the MFIs are highly leveraged, they use approximately four times more debt financing than equity. Further the regression results revealed that total debt to assets and short term debt to assets have a positive and significant effect on cost of funds. Long term debt to assets also has a positive impact on cost of funds, but the relationship was not significant. Total debt to assets and long term debt to assets have a negative and significant effect on return on assets. Short term debt to assets also has a negative effect on return on assets, but the relationship was not significant. There were not detected any significance between the debt to equity ratios and MFIs performance in this study.