Capital Structure and Sustainability: An Empirical Study of Microfinance Institutions

This paper examines the existing sources of funding for MFIs by geographic region, and explores how changes in capital structure could improve the efficiency and financial sustainability of MFIs.

MFIs have risen to the forefront as invaluable lending institutions in the development process. Since capital constraints have hindered the expansion of microfinance programs, and microfinance organizations have had various degrees of sustainability, the question of how best to finance these organizations is a key issue.

Using panel data, the paper establishes a link between capital structure and key measures of MFI success. The paper finds that:

• Asset size does matter in terms of sustainability and outreach;
• Grants as a percent of assets is significant and negatively related to sustainability, but is positively related to MFI cost per borrower;
• Long-term use of grants may be related to inefficient operations due to lack of competitive pressures associated with attracting market funding.