Financial leverage and profitability of microfinance institutions in sub-Saharan Africa

Abstract

Prior empirical studies have sought to establish whether financial leverage boosts or stifles a firm’s profitability. By stark contrast, we are unaware of an empirical study that has attempted to investigate the leverage–profitability nexus in the microfinance context. Thus, we study the effect of financial leverage on the profitability of microfinance institutions, domiciled in sub-Saharan Africa, by exploiting a Microfinance Information eXchange (MIX) data set consisting of 465 microfinance institutions, drawn from 37 countries, over the period 1996 to 2012. By employing the generalized method of moments (GMM) estimation technique, we found that financial leverage is negatively associated with the profitability of microfinance institutions in sub-Saharan Africa. The plausible explanation for our findings is the persistently high costs of debt finance among many African countries. More importantly, policy implications are drawn from these findings.