The Impact of Capital Structure on the Profitability of Microfinance Institutions

The study focuses on the sources of funding and the relative profitability
derived by the microfinance organizations. The study considers three
variables, which relate to the profitability (a dependent factor): return-onassets
(ROA), operational-self-sufficiency (OSS), and return-on-equity (ROE).
The independent factor (financial sources), on the other hand, employs:
deposit-to-asset, net-deposits, and lastly debt-to-equity ratio. Moreover, the
control variables specified in this study are that of women borrowers, size
regulations, and age. The study utilizes cross-sectional (unbalanced) panel
data (2004-10) from about seventy countries around the world, covering up to
six regions globally. To bring forth estimations for the models used, the
random-effect-model has been employed. The results indicated that deposits
enhance the levels of debt in ones’ capital-structuring, thereby complementing
the firm’s overall profitability. Whereas, increased amounts of operating costs
and relative risks juts down the profitability. As with the variables of control,
the t-test leads us to the conclusion that micro-financiers with more women
borrowers enjoy a significantly higher profitability, perhaps due to less
default-risk brought about by the regular loan repayments.