Impact of capital structure on performance of microfinance institutions

Abstract

Microfinance institutions play a crucial role in poverty alleviation and provide financial services to low-income households. Microfinance growth rate is quite high in Asia but an undesirable development is achieved due to high borrowing cost and inadequate reserves. For microfinance institutions, there is a need to determine a suitable mix of financing to stay sustainable. This study examines the impact of capital structure on the performance of microfinance institutions in Asia. Using a unique unbalanced panel data set of 253 microfinance institutions from 2000 to 2015, performance is measured in terms of sustainability, financial performance, social performance and efficiency. It is evident from the findings that capital structure and microfinance characteristics play a significant role in the performance. Grants to assets increase operational self-sufficiency and debt to equity increases the financial self-sufficiency of microfinance institutions. Microfinance characteristics like borrowers, loan intensity, and size of institutions upsurge sustainability. Banks and NGOs positively affect the financial and social performance of microfinance institutions. Deposit to asset ratio, debt to assets, and debt to equity impact outreach and return on the asset while grants decrease financial self-sufficiency and return on equity. At macroeconomic level, gross domestic product contributes to sustainability and management efficiency. However, inflation declines financial performance. Implications emerge from the findings are a crucial element in the performance of financial institutions. Microfinance institutions should maintain an optimal capital to ensure that their going concern is assured a all times. Therefore, managers should appropriately justify capital structure to stay sustainable.