Capital structure and financial sustainability of Microfinance Institutions (MFIs) in Rwanda

Abstract

The aim of this study was to assess the effect of capital structure on financial sustainability of microfinance institutions (MFIs), and find out the extent to which capital structure affects financial sustainability of MFIs in Rwanda. Data was collected from annual financial reports of MFIs and SACCOs for the period 2014-2018. Due to data availability, only a panel of 20 MFIs and SACCOs was considered using fixed effects OLS regression models. Findings from this study reveal that the use of debt as financing sources adversely affects firms‘ financial self-sufficiency and performance. In contrast, the use of share capital strongly improves firms‘ operational and financial sustainability as well as their return on assets. Using retained earnings moderately and positively increases firm‘s financial sustainability. Results from sample splits show that compared to MFIs, SACCOs are more likely to be adversely affected by debt financing than their MFI counterparts. With respect to share capital, there is significant difference between the two groups. Using share capital to finance MFIs‘ investments significantly increases their return on assets, their operational and financial self-sufficiency. With respect to SACCOs, results show that using share capital as means of financing firms‘ assets negatively and significantly affects their return on total assets as well as their operating and financial self-sufficiency.

Efectos de la titulización de cartera de crédito en la estructura de capital: un caso de estudio

“…Este enfoque resultó ser el más adecuado para el análisis de las variables determinantes de la estructura de capital. De acuerdo con Rutanga et al (2021), al igual que en la regresión lineal simple, los coeficientes rotados revelan el cambio en la magnitud de la variable dependiente por cada incremento unitario en la variable explicativa correspondiente. Estos coeficientes, por tanto, se presentan en sus respectivas unidades de medida.…”

Effect of capital structure on the performanceof microfinance institutions in Oman

“…It is identified during the sector that microfinance governance (CG) has turned out to be one of the vital problems in comparing the strengths and functions of a company (3). According to Rutanga et al (18), despite the fact that although MFIs exist in many developing nations, millions of families and individuals still lack access to loans and other financial services. This is because the microfinance organization has higher operating and capital costs, which makes it difficult to meet client demand and help them achieve their financial and social goals.…”

“…Also, microfinance banks must have sufficient liquidity to repay their debt obligations. Rutanga et al (18) determined the impact of capital structure on MFIs' financial viability and found out the amount to which capital structure moves. Data were gathered from a panel of 20 MFIs' annual financial reports.…”

The effect of capital structure on the financial sustainability of microfinance institutions: A meta‐analysis

“…For example, although some studies have reported a positive relationship between deposits and operational self‐sufficiency (Abrar & Javaid, 2016; Aza, 2018; Bayai & Ikhide, 2018; Duguma & Han, 2018; Fadikpe et al, 2022), others have found a negative relationship (Bibi et al, 2022; Bogan, 2012; Dorfleitner et al, 2020; Gul et al, 2017). Similarly, conclusions regarding the influence of equity on financial self‐sufficiency (FSS) have also been divided, with some studies suggesting a positive impact (Abdulhakim & Mersha, 2020; Nyamsogoro, 2016; Rutanga et al, 2021; Sekabira, 2013), whereas others challenge this assertion (Ali et al, 2020; Mwizarubi et al, 2016; Perera, 2021; Quayes, 2012).…”