Effect of Capital Structure on MFIs’ Financial Performance: A Case Study of Kitwe District, Zambia

The research aimed at assessing the effect of different types of securing capital and operating funds in the Microfinance industry on the financial performance of MFIs in Kitwe District. The two methods of qualitative and quantitative approaches assured a validation of findings, especially with the support of descriptive and inferential statistical analysis of data from 40 MFIs over the period of the firms' operation from inception to the time of study. The research findings revealed that most institutions have a significant dependency on debt component as the structure of their capital to sustain their operation. The average proportion of the debt component was found to be about 44.6% of the operating capital. This amount is the remainder of capital from shares (20.8%), donor funds (14.4%), deposits (11.18%), and retained earnings (9.8%). Although many think that borrowing more capital or a combination of raising funds increases profits and growth, the results show there is no strong relationship between the type of fundraising and the probability of success in business (2(8) = 7.45, p = 0.89). But there is strong evidence of a relationship between the size of the institution's capital and improved performance, especially in growing capability (Chi(8) = 15.56, p = 0.049). This means larger MFIs with more capital can easily grow quickly as they provide a buffer and funding to borrowers in the community. It estimated the average ROA for MFIs, and so, the average ROA was 9.1%, with SD 4.82%. That means the ROA is not sufficient in those MFIs studied. The research concludes that while a combination of raising capital from various means to form a structure improves managers’ reliance on output and better management, actual capital results are affected by other factors, such as management quality and less waste. This study enhances understanding of the funding structure of MFIs in Sub-Saharan Africa and the effect it has on the going concern of the MFIs. Hence, the study recommends that the capital acquired, regardless of structure, has no much impact of performance unless the use and management strategy takes a huge portion in the operation. Hence, MFIs should employ sound capital exploitation strategies to get a yield from them.