Capital Structure, Financial Performance, and Sustainability of Micro-Finance Institutions (MFIs) in Bangladesh

Qingfeng Cao,Belayet Hossain,Syeda Sonia Parvin,Muhammad Mohiuddin

doi:10.3390/su12156222

Abstract

Capital structure plays an important role in organizational performance. Sources of funds for micro-finance institutions (MFIs) and their performance and financial sustainability become an important topic for the MFIs and poverty alleviation initiatives to achieve sustainable development goals of the UN. We explored the following question: Does the financial structure in terms of financial leverage affect the financial performance: Financial sustainability, depth, and breadth of outreach of MFIs? Our research focuses on studying the relationship between capital structure and financial performance of micro-finance institutions as well as achieving the objectives of this program by reaching out to the deserving clients without collaterals. A dataset of 187 MFIs is used to establish the relationship between the capital structure and performance of MFIs. Panel data regression analysis has been used for this study using the Random effect and Fixed effect models. Return on Asset (ROA), and Net Income to Expenditure (NIER) have been used as measures of financial performance. The findings indicate that Equity to Asset Ratio (EAR), Debt to Loan Ratio (DTL), Risk, and Size are the factors that influence NIER. Furthermore, EAR, and DTL have a positive effect on ROA, and Risk has a negative effect. The findings of this study will enable MFIs to configure their capital structure by creating a portfolio of sources of their capital from market-based sources of funds that can maximize their financial performance and reach out to poor clients without collaterals.

Highlights

Poverty alleviation by microcredit is used as an effective tool across the globe [1,2,3]
The performance of micro-finance institutions (MFIs) is measured by Return on Asset (ROA) and Net Income to Expenditure (NIER), and these two variables are used as dependent variables, which are related to the profitability as well as sustainability
When Equity to Asset Ratio (EAR) is increased by 10%, Net Income to Expenditure Ratio (NIER) is increased by 6.52%

Summary

Introduction

Poverty alleviation by microcredit is used as an effective tool across the globe [1,2,3]. MFIs often start lending operations to a low-income community and help them to develop different types of micro-entrepreneurial ventures in developing countries. These clients do not have credit history, collateral, or both [4,5,6]. As field workers are involved to provide trade and training services to their clients, MFIs have greater transaction cost per loan. Despite the higher interest rates, poor households take loans from MFIs as they do not have a cheaper alternative They do not have access to a loan from other financial institutions except for local money lenders due to lack of collateral. With the loan from MFIs, they can create small and micro-enterprises, create income-generating activities for themselves and their family members, and can come out of poverty

Objectives

Methods

Results

Discussion

Conclusion