Abstract
Microfinance institution plays a crucial role in economic development and financial inclusion. Financial sustainability is the key dimension to microfinance institutions growth. Which further indicate the importance of which Financial sustainability is. Therefore, the present study investigated the effect of financial leverage on MFI financial sustainability. The specific objective was to establish the effect of financial leverage on the financial sustainability of MFIs. The study was guided by agency theory and life-cycle theory. The study adopted an explanatory research design where a panel approach was used as well as the positivist paradigm. The study adopted the census approach method. Panel data was drawn from 30 MFIs for a period between 2010 and 2018 from the mix market database using the data collection schedule. The study used both descriptive and inferential statistics to analyze data with the help of STATA software. Fixed effect model based on Hausman test (X2 = 45.41, p= 0.000 ≤ 0.05). Based on the findings of the study financial leverage ( the study had a positive and significant effect on the financial sustainability of MFIs. The study recommended MFIs managers to engage in the prudent use of financial leverage so that they enhance their overall profitability and boost investor confidence in their strategic decision-making resulting in financial sustainability. The results have an implication to business managers and policymakers given the vital role in service delivery and the challenges hindering the sector from the realization of financial sustainability in the economy.
Highlights
Microfinance institutions (MFIs) are feted and perceived as a panacea to economic development; they are perceived as key contributors to financial inclusion, especially in developing nations (Lopatta et al, 2017)
The findings of this study revealed that financial leverage has a positive and significant effect on MFIs’ financial sustainability
The study concluded that financial leverage leads to financially sustainable MFIs
Summary
Microfinance institutions (MFIs) are feted and perceived as a panacea to economic development; they are perceived as key contributors to financial inclusion, especially in developing nations (Lopatta et al, 2017). Scholars have attributed financial exclusion to factors such as high transaction cost, inadequate collateral, information opacity and higher default rates (Olomi, 2009) It is a tactical failure of the conventional financial institutions when they fail to provide credit services to the poor and microenterprises in developing nations, since these are viewed as unbankable because of their low disposable income. The poor have largely demonstrated that they are bankable; they can save, borrow and pay just like any other investor (Abate et al, 2013) This has motivated MFIs to continue serving the poor through approaches such as solidarity lending, progressive lending with a regular repayment schedule as a dynamic incentive and loan guarantees (Thapa, 2006). This can be achieved through the commercialization and competition of micro-lending services focusing on financial sustainability (Abate et al, 2013)
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