The Effects of Capital Structure on the Performance of Microfinance Institutions in Bangladesh

Abstract

The present study investigates the relationship between capital structure and the performance of microfinance institutions. Performance is measured in terms of outreach and default ratio. Capital structure is incorporated in the form of total debt, borrowings, deposits, and donated equity relative to total assets. Panel data of 38 MFIs operating in Bangladesh covering the fifteen-year period 2003-2017 were analyzed within the framework of fixed- and random-effects techniques. Most of the microfinance institutions are highly leveraged and most of these debts are in the forms of borrowings and deposits fund, suggesting a considerable dependence on leverage by MFIs for their operations. Highly leveraged microfinance institutions perform better because management of these firms take microcredit programs to greater number of borrowers and disburse loans cautiously to minimize default rates. MFIs, reliant on donors’ equity, are less likely to minimize default ratio as they don’t have obligations for repayment to donors.