The Capital Structure and the Performance of Microfinance Institutions (A Case Study of Microfinance Institutions Kampala District, Uganda)

Abstract

This study focused on establishing the impact of Capital Structure on the performance of Microfinance Institutions (MFIs) in Uganda with a case study of Kampala district. Conceptually, a framework was developed by the researcher from the available literature relating to capital structure and performance of MFIs. A cross sectional research design was adopted and data was collected from both primary and secondary sources. The independent variable of the study was capital structure with sub variables as long and short—term debts. The dependent variable was performance with sub variables as default rates, outreach rates and profitability. The findings indicated that Microfinance Institutions (MFIs) have risen to the forefront as invaluable institutions in the development process to build a framework for poverty alleviation. Nevertheless, capital constraint have hindered the expansion of microfinance programs such that the demand for financial services still far exceeds the currently available supply. has been observed that microfinance institutions have had various degrees of sustainability over the years. Thus, the question of how best to fund these programs is a key issue. Recognizing the potential of microfinance in the development process, this thesis examines the existing sources of funding for FIs in Uganda, and explores how changes in capital structure could facilitate future growth and reduce default rates and financial sustainability of MFIs. The findings established a link between capital structure and key measures of MFI performance. On the basis of the findings, the study recommends that MFIs could develop strategies of accessing long-term sources of finance in order to able to expand their clientele base and hence outreach.

TABLE OF CONTENTS

Page

Title

Declaration

Dedication iii

Acknowledgement

Table of contenj~

List of tables

List of figures

List of acronyms and abbreviations viii

Abstract

CHAPTER ONE; INTRODUCUON

1.0 Introduction 1

1.1 Background 1

1.2 Statement of the Problem 2

1.3 Purpose of the Study 3

1.4 ObJectives of the Study 4

1.5 Research Questions 4

1.6 Significance of the Study 4

1.7 Scope of the Study

1.8 Conceptual framework 6

CHAPTER TWO: REVIEW OF RELATED LITERATURE

~.0 Intnxjucljon 8

~.1 Determining capital stru~re 8

~.2 Performance of Micro Finance Institutions 12

~.3 Relationship between capital structure and performance 13

CHAPTER THREE: METHODOLOGy

3.0 Introduction 16

3.1 Research design 16

3.2 Study population 16

3.3 Sample size and sample procedure 17

3.4SourceofData 18

3.5 Data collection methods and procedure 18

3.6 Variables and their measurements 18

3.7 Reliability and validity of the instruments 19

3.7.1 Validity 19

3.7.2 Reliability 19

3.8 Data processing and analysis 20

3.9 Anticipated limitations of the study 20

CHAPTER FOUR: FINDINGS

LO Introduction 22

~.1 General Information 22

.2 Determination of capital structure 26

.3 Relationship between capital structure and performance of microfinance

Istitutions 32

HAPTER FIVE: DISCUSSION, CONCLUSION AND RECOMMENDATIONS

0 Introduction 35

1 Discussion of findings 35

1.1 To examine how MFIs determine their capital structure 35

1.2 To examine the performance of MFIs in Uganda 35

1. .3 Relationship between capital structure & performance of NFIs in randa 36

Conclusion 36

Recommendations

Areas for further research 38

References

Appendices:

Appendix Al: Transmfttal Letter

Appendix A2: Response Letter

Appendix B: Questionnaires

Appendix C: Map of Uganda

Appendix D: Map of Kampala

Appendix E: Computation