Capital Structure And Performance Of Microfinance Institutions In Mbarara District. A Case Study Of Finca Mdi

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.