Abstract
The paper examines the relationship between capital structure, credit risk management and financial performance of microfinance institutions (MFIs) in Uganda based on agency theory. The study adopted a cross–sectional research design to examine 64 MFIs in Uganda. Correlation and multiple regression analysis were performed to analyze the data. The results reveal that credit risk management significantly contributes to sound financial performance. Second, capital structure is not significantly related to financial performance. Therefore, credit risk appraisal, credit risk monitoring and credit risk mitigation are essential in achieving sound financial performance of MFIs. However, the structure of debt or equity does not necessarily affect financial performance. Hence, managers should endeavor to instill risk preventive and control mechanisms so as to mitigate credit risks and achieve positive financial performance of MFIs. Key words: Agency theory, capital structure, credit risk management, financial performance, microfinance institutions.
Highlights
Financial performance is an essential measure of the financial health, competitiveness, efficiency, cost effectiveness and productivity of a business enterprise
For better understanding and discussion of the empirical, theoretical and conceptual framework of the study variables, we provide the organizational characteristics of microfinance institutions (MFIs) under study
The study set out to examine the contribution of capital structure and credit risk management to financial performance of MFIs in Uganda
Summary
Financial performance is an essential measure of the financial health, competitiveness, efficiency, cost effectiveness and productivity of a business enterprise. MFIs that experience sound financial performance exhibit high profits, portfolio quality and operational efficiency as well as improved competitive edge (Quayes, 2015). Good financial performance of microfinance institutions (MFIs) leads to realization of MFIs’ profit maximization objective, reduction in the dependency rate, improved competitive edge and promotion of entrepreneurial ventures as well as economic development in a country (Bassem, 2012; Otieno et al, 2016). As a result of sound financial performance, MFIs are able to improve the welfare of people through wealth creation and poverty reduction. Global empirical evidence observes that microfinance institutions experience poor financial performance, epitomized by low profitability, low portfolio quality, low operating efficiency and high operating costs. In Africa, MFIs manifest poor financial performance as evidenced by low efficiency ratios, declining net operating margins and declining portfolio
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