Determinants of Capital Structure Decisions Among Ethiopian Micro Finance Institutions: Panel Data Evidence

Abstract

Studies indicates that the capital structure of Microfinance Institutions have significant impact on the sustainability and outreach of these organizations. Hence, studying the factors that determine the capital structure of these organizations is imperative. Although the capital structure of financial firms have been studied by some scholars, such types of studies are rare in the MFI sector. Thus the purpose of this study is to investigate the determinants of capital structure in the Ethiopia MFI industry. To accomplish the objective of the study the quantitative research design is employed. The researcher used secondary data of 15 sample MFIs that fulfill the criteria of data availability from the MIX market database covering the period of 2003–2009. A panel data using Random Effect Multiple Regression model is used to analyze the standard determinants of capital structure. A sequential regression approach with two alternative specifications of model was employed. The research results show a negative and significant relationship between the MFI profitability, positive and significant relationship between MFI size, a negative and significant relationship between MFI tangibility and the leverage was found. On the other hand, the results show mixed results for the impacts of both age and growth rate on the leverage of Ethiopian MFIs. However, a negative but insignificant impact of business risk on leverage was found. The results of this study have delivered some insights on the capital structure theory. There could also be policies intended to encourage and creating conducive environment for MFIs to utilize debt as a viable source of finance in the era of increased commercialization of microfinance to meet their noble objective.

Keywords: Determinants, Capital Structure, MFI, Ethiopia