An Empirical Study Evaluating the Role of Capital Structure on Financial Performance and Sustainability of Microfinance Institutions (MFIs) in Ghana

Abstract

In Ghana, MFIs have risen to prominence as crucial lending institutions in the development process as they offer financial services to the poor. Microfinance is defined as the provision of savings and loans to low-income clients. The study examines the effect of capital structure on the 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. Secondary data was collected from the MFIs licensed by the Bank of Ghana. 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. Additionally, capital structure variables are strongly associated with profitability but exert insignificant impacts on the 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. A stable macroeconomic environment is essential to enhancing the financial performance and sustainability of MFIs.