The IUP Journal of Applied Finance
Capital Structure and Performance of Indian Microfinance Institutions

Article Details
Pub. Date : Oct, 2020
Product Name : The IUP Journal of Applied Finance
Product Type : Article
Product Code : IJAF21020
Author Name : Swati Chauhan,C V R S Vijaya Kumar and Ashutosh Verma
Availability : YES
Subject/Domain : Finance
Download Format : PDF Format
No. of Pages : 19



The main aim of this paper is to explore the impact of capital structure on the performance of Microfinance Institutions (MFIs), which have double bottom line, outreach and financial sustainability goals. The paper examines the relationship between MFIs’ capital structure and financial and social performance. The random and fixed effect models have been applied to a panel dataset of 46 Indian Non-Banking Financial Companies-Microfinance Institutions (NBFC-MFIs) for the period 2009-10 to 2014-15. Panel regression analysis shows that Indian MFIs are highly leveraged, which has enhanced the efficiency of NBFC-MFIs by reducing cost per borrower and operating expenses resulting in improvement of portfolio quality. Leverage has a positive and significant impact on social and financial dimensions of the MFIs. This is a unique study in the Indian microfinance sector that explores the impact of capital structure on MFIs’ social and financial dimensions.


Agency costs arise due to dissociation of ownership and control of the firm as managers who are agents of shareholders may set and pursue their interests which may be inconsistent with organizational goals leading to agency conflicts. One way to diminish agency costs is to appropriately design the firm’s capital structure so as to reduce its impact to the minimum. The agency cost theory of the business points out that high leverage lowers expenses for external equity companies by pushing managers to work harder in favor of shareholders (Berger and Di Patti, 2006). Capital structure influences a company’s efficiency but varies from the pioneering work of Modigliani and Miller’s (1958) who postulated that capital structure is unrelated to the profitability of a company. Modigliani and Miller’s (1958) work was based on the assumptions of absence of perfect capital market, no taxes, absence of trading cost and similar expectations of investors. Hamada (1969) and Stiglitz (1974) had supported the work of Modigliani and Miller, but in the present scenario where there is a high competition, such assumptions will not hold good. Jensen and Meckling (1976), Myers (1977), Williams (1987), and Harris and Raviv (1990) have highlighted the limitations of assertions made by Modigliani and Miller (1958).

Empirical research has focused on the capital structure and the performance of the firms and found mixed results. The studies of Abor (2005), Berger and Di Patti (2006), and


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