Microfinance Performance: Does Financing Choice Matter?

Abstract

Since the seminal work by Modigliani and Miller in (1958) and the subsequent revision of their initial position (1963), several studies have shown that capital structure influences performance of corporate entities. Although the empirical evidence remains mixed and contestable, microfinance industry appears to have been neglected in this research agenda. This paper examines the impact of financing choice on microfinance performance. The study is pioneering in using system GMM estimators in studies of microfinance performance. The analytical framework uses an unbalanced panel dataset comprising of 210 MFIs across 32 Sub-Sahara Africa countries operating from 1997 to 2008. We test the robustness of the models with different specifications that confirm the general result. The estimation results show that a proportionally higher deposit-assets ratio is associated with improved profitability. However, the magnitude of this effect is sensitive to MFI age. MFIs with a higher portfolio-assets ratio are more profitable. But the impact also depends on MFI age. Consistent with the agency costs hypothesis, the results show that highly leveraged MFIs are more profitable. This calls for the development of appropriate regulatory policies that would enable MFIs to access long-term debt to enhance profitability and to strengthen the financial stability. JEL classification: F3, G21, G32 Keywords: Microfinance institutions; sub-Sahara Africa; performance, capital structure