The impact of capital structure on the performance of microfinance institutions

TLDR

This is the first study of its kind in the sector, especially within sub‑Saharan Africa. The study examines the impact of capital structure on microfinance institutions’ performance. Panel data from 1995‑2004 were analyzed using fixed‑ and random‑effects techniques. Most microfinance institutions use high leverage and long‑term debt, and those with higher leverage perform better by reaching more clients, achieving scale economies, and better managing moral hazard and adverse selection, thereby improving risk management.

Abstract

Purpose The purpose of this paper is to examine the impact of capital structure on the performance of microfinance institutions. Design/methodology/approach Panel data covering the ten‐year period 1995‐2004 were analyzed within the framework of fixed‐ and random‐effects techniques. Findings Most of the microfinance institutions employ high leverage and finance their operations with long‐term as against short‐term debt. Also, highly leveraged microfinance institutions perform better by reaching out to more clientele, enjoy scale economies, and therefore are better able to deal with moral hazard and adverse selection, enhancing their ability to deal with risk. Originality/value This is the first study of its kind in the sector, especially within sub‐Saharan Africa.