Abstract
Using a panel data methodology, this study examines the determinants of capital structure of 52 microfinance institutions (MFIs) in Ghana. The empirical results show that the MFIs are highly leveraged and that their capital structure is explained partly by standard finance theory and by other unconventional variables. Specifically, the study confirms that leverage is positively related to asset tangibility, with small MFIs using short-term and large MFIs using long-term debt. Though, the findings confirm that leverage is inversely related to risk, they also suggest that some MFIs enjoy long-term debt in spite of risk, while profitability is irrelevant in explaining the capital structure decisions of MFIs. Finally, the study shows that the reputation and board independence of MFIs significantly and positively affect their capital structure decisions.
Highlights
Since the landmark paper by Modigliani and Miller published in 1958, debate has raged about the theoretical basis for the determinants of capital structure in firms
Their conclusion, is based on what is termed ‘restrictive and unrealistic’ assumptions such as a world with perfect capital markets, absence of corporate and personal taxes, and independent firms’ financing decisions. Adapting these assumptions to more realistic expectations and repeating the analysis suggests that capital structure decisions do affect a firm’s value
This study aimed at identifying the determinants of capital structure of Microfinance Institutions (MFIs) in Ghana, and to ascertain whether standard finance theory explains their financing decisions
Summary
Since the landmark paper by Modigliani and Miller published in 1958, debate has raged about the theoretical basis for the determinants of capital structure in firms. Financial theory has made considerable progress in efforts at explaining capital structure decisions and the variables that determine these. In this quest, various theoretical models have been proposed to explain capital structure patterns across companies and countries, and many of these models have been empirically tested in the real business world. Following MFI successes such as the Grameen Bank of Bangladesh and Banco Solidario of Bolivia, considerable attention has been devoted to the sector by several players These include governments, non-governmental organisations (NGOs), community activists and even some large commercial banks, which have re-channelled efforts and resources towards microfinance and microenterprise projects (Conning, 1999). The paper is organised as follows: section two reviews the relevant literature, section three presents data collection and methodological issues, section four discusses the empirical findings, and section five concludes with the findings of the study
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