Capital structure, financial performance and sustainability of Microfinance Institutions (MFIs) in Ghana

Abstract

The study examines the effect of capital structure on financial performance and sustainability of Microfinance Institutions in Ghana. We investigate the role of debt-to-equity ratio, equity-to-asset ratio, and deposit-to-loan ratio in guaranteeing financial performance and sustainability. We implement multiple regression methods to investigate the relationship between the observed performance indicators and a set of explanatory variables. The empirical analysis involves 51 Ghanaian MFIs reporting on the MIX market. We find strong empirical support for the notion that asset size is significantly and positively related to asset returns, self-sufficiency, and financial sustainability. Also, capital structure variables are strongly associated with profitability but exert insignificant impacts on operational self-sufficiency and financial instability of MFIs. The macroeconomic environment also matters to the profitability, self-sufficiency, and sustainability of MFIs. The ability of the MFIs to improve security and lessen the risk is critical in ensuring profit efficiency and self-sufficiency.

Keywords:

• capital structure
• microfinance institution
• financial sustainability
• financial performance
• macroeconomic factors

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1. Probit performs relatively better in the case of both random and fixed effects effects models with moderate or large sample sizes (Hahn & Soyer, 2005)