Determinants of Capital Structure and Performance of Microfinance Banks in Nigeria

Abstract

In recent times, capital structure decisions have become increasingly important, particularly for financial institutions such as microfinance banks (MFBs). As a result, this study seeks to analyze factors determining the capital structures of MFBs in Nigeria alongside examining its effect on their performance. Return on Equity (ROE) was employed as an indicator for the evaluation of bank performance, and capital structure was assessed via proxies like the Debt Ratio (DR), Short-Term Debt to Total Asset Ratio (STA), and Debt to Equity Ratio (DER). The study selected 20 MFBs using purposive sampling method and collected secondary data from their annual reports between 2012 and 2021. Analyzing this data involved utilizing descriptive statistics and panel data regression techniques. Findings showed that all the variables (DER, STA and DR) positively and substantially influenced ROE, implying higher debt funding may enhance bank performance. Interestingly, asset tangibility, bank size and age were found to have a considerably favorable effect on capital structure whereas liquidity and capital adequacy had an unfavorable effect. The study indicates the robust predictive power of the tested variables on MFBs' capital structure. Consequently, it is prudent for bank executives to acknowledge these salient variables in order to optimize their operational efficiency.