The Effect of Capital Structure on Financial Sustainability of Microfinance Institutions in Ethiopia: A Panel Data Approach
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Date
2022-11-03
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A.A.U.
Abstract
This study examined the effect of capital structure on the financial sustainability of microfinance institutions (MFIs) in Ethiopia. The study was conducted using panel fixed effect multiple regression model during the 2011-2020 period. Due to data availability, out of a total of 49 MFIs in Ethiopia, only 20 MFI panels are included to examine the MFIs’ capital structure on financial sustainability. The purposive non-probability sampling was used to select samples based on the availability of financial data and the duration of the microfinance institutions' existence. The data analysis included both descriptive and inferential statistics. The confidence levels p<.01, p<.05, p<.1 were used to test the hypotheses. The study used operational self-sufficiency (OSS) as a measure of financial sustainability as dependent variable and four capital structure measures including capital-to assets (CAR), debt-to-equity ratio (DER), deposit-to-loan ratio (DLR) and deposit-to-assets ratio (DAR) as independent variable. Other factors affecting financial sustainability are considered as control variables including size of the MFIs, age of the MFIs and risk (measured by portfolio at risk). The study discovered that financial sustainability is positively correlated with capital-to-assets ratio (CAR) and deposit-to-loan ratio (DLR), at a 5% level, this association is statistically significant. On the other hand, the ratios of debt to equity (DER) and deposits to total assets (DAR) have very little bearing on OSS. According to the findings, operational self-sufficiency (OSS) for MFIs will typically rise by 2.8% for every percentage increase in DER while falling by 5.7% for every percentage increase in DAR. MFIs in Ethiopia must take prudence while building portfolios because the choice of a portfolio had a negative effect on sustainability. From the findings, it is strongly recommended that microfinance institutions in Ethiopia should also work to increase their repayment rates. The broad market access, information sharing, and portfolio quality monitoring that have a positive impact on long-term financial sustainability may be crucial for this purpose