Capital structure and performance of microfinance institutions in Mbarara District: a case study of Finca MDI
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Date
2014-07
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Kampala International University.College of Economics and Management
Abstract
The purpose of the study was to investigate the relationship between capital structure and
performance of Microfinance institutions in Mbarara district. The study was guided by three
specific objectives and these included i) to examine the relationship between capital structure
and perfonnance of microfinance institutions in Mbarara district, ii) to determine the components
of capital structure and perfonnance of Finca Microfinance and iii) to examine the effect of
capital structure, cost of capital and loan covenants on of Microfinance institutions in Mbarara
distJict.
The study employed cross-sectional survey design since it is a case study of FIN CA MDI. This
study adopted both qualitative and quantitative approaches in its methodology and a sample size
of I 65 respondents was used. The study findings revealed that the correlation coefficient
between correlation between capital structure and perfonnance of microfinance is positive that is
0.935 which means that an increase in capital structure also leads to an increase in pe1formance
of microfinance and a decrease in perfonnance of microfinance also leads to a decrease in
customer structure. , majority of the respondents reported Profitability as the leading component
of financial structure with 29%, 19% of the respondents agrees that Net Profit Margin is the best
component, 9% repmted Net Profit Margin, 21% repmted Return on Investment and Return on
Equity and 25% insist that Liqnidity is the strategy that brings performance of Finca MDI.the
study recommended that Microfinance institutions in Mbarara should avoid an over reliance on
debt financing alternatively, Microfinance institutions that pursue a high debt policy compared to
the industry average should seriously consider increasing the equity component in their capital
structure in order to avoid the negative effects of excessive debt on performance. This can be by
way of private placements which are a form of raising capital without necessarily over borrowing
from financial institutions. Bank or financial institutions need to regularly visit and try to
understand the operations of Microfinance institutions better thereby nurturing long lasting
relations which wonld eventually result into customer loyalty.
On the aspect of interest rates, it is recommended that Financial Institutions should consider a
further lowering of their base lending rates and overall interest charged to Microfinance
institutions in order to reduce on non perfonning loans and improve on the financial performance
of Microfinance institutions.
Description
Research report submitted to the College of Economics and Management Sciences in partial fulfillment of the requirements for the award of a bachelor's degree in Business Administration of Kampala International University
Keywords
Capital, Structure, Performance, Microfinance, Institutions, Mbarara