The Effect of Financing Structure on Financial Performance of Micro Banks: An Empirical Analysis of Ethiopian MFIs

Abstract

Financing decisions are one of the most critical areas for finance managers. Studying the influence of capital structure and financial performance of the companies is vital. It has always been an area for interest for researchers to understand the relationship between capital structure and financial performance of the business organization. The capital structure of Microfinance Institutions (MFIs) has significant impact on the performance of this organization. Hence, studying the effect of the financial structure of these organizations is imperative. Although the financial 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 effect of financial structure in the Performance of Ethiopian MFI industry. To accomplish the objective of the study a quantitative research design is employed. The researcher used data of 16 sample MFIs that fulfill the criteria of data availability from the database covering the period of 2008–2015. This study is a moderate attempt to understand the relationship between capital structure and financial performance of the MFIs industry by taking Ethiopia. For this purpose, the study used definition of capital structure in the debt to equity ratio and uses ROE and ROA proxy for financial performance of MFIs. In this study, the data of 16 MFIs listed on MIXMARKET of Ethiopian in a 7-year time horizon (2008-2015) were used. Results of our study demonstrated that capital structure influences financial performance of Ethiopian Micro Banks Industry. The significance of the influence of capital structure on performance of MFIs is respectively belonged to measures taken by the regulatory organ of NBE & finance managers of the Microfinance Institutions to create conducive environment.