THE IMPACT OF CAPITAL STRUCTURE ON THE PERFORMANCE OF MICRO FINANCE INSTITUTIONS
CHAPTER ONE
1.0 INTROCUCTION TO STUDY
1.1 OVERVIEW
This chapter of our study gives attention to the background information to the problem under study, gives the statement of the problem, and gives brief information on the research questions and the research objectives under study not forgetting the significance of the study. This chapter again concentrates on the introduction which includes the background to the problem, statement of the problem, research objectives and the research questions plus the significance of the study and the limitations of the study.
The capital structure of an institution is basically a mix of debt and equity which a firm is deems as appropriate to enhance its operations. Capital structure issue is one of the core financial decisions and it has become an increasingly prominent issue particularly for lending firms. Recent financial crisis require government to take bailout programs and institutional restructuring program which addressed the funding structures of institution. Optimal capital structures though not measureable within the existing frame work of corporate finance, firms also try to set optimal capital structures. For both financial and nonfinancial corporate enterprises, the issue of corporate government is now rampant as separation of ownership and management control result in agency problem. In such circumstances, managers are most likely to pursue an objective function which is variance with the firm or owners objectives. For this reason, agency cost arises from divergence between ownership and control. If managers pursue their goal ahead of the firm’s interest, agency cost becomes higher and a firm loses its values. Several techniques are available in corporate finance to curve this agency cost problem, where capital structure is considered as one the fruitful ways to keep adequate control. Berger and Di Patti {2006} concludes that high leverage or high equity multiplier has the potential to minimize the agency cost of outside equity and to enhance the firms values by encouraging managers to act more in the interest of the firms shareholders. Theoretically, it’s expected that firms decisions concerning capital structure has certain influence on the firms performance against the position held by Modigliani and Miller in their seminal work {Modigliani and Miller, 1958}.
Few studies have been carried out with the issue of measuring the influence of capital structure on firm’s performance and in many cases the studies were found on developed countries with large and listed firms. Recognizing the potential of microfinance in the development process, Bogan {2008} examined the studies was focused of funding for MFIs in accordance to geographic region. He has explored how change in capital structure could facilitate future growth and improve the efficiency and financial sustainability of MFIs. Lislevand {2012} attempt to identify the effect of capital structure on the overall performance of micro finance institutions based on 403 MFI in 73 countries. Manawaduge et al.,{2010} examine the implications of capital structure of corporate entities in an emerging market, Sri Lanka. Ismail and possumah {2012} attempted to explore how changes and variety of source of fund in capital structure could improve Islamic microfinance institutions efficiency and financial performance. Within the sub Saharan Africa, kyereboah Coleman {2007} is first who examine the impact of capital structure on the performance of MFIs.
Bangladesh is the birth place of micro credit programs in the world. The Pili Karma Sahayak Foundation {PKSF} was established in the late 1990 to meet the demand for funds for relenting by the development partner {NGO MFI}, and to coordinate the appropriate use of funds. At present, mainly four types of institutions are involve in micro finance activities in Cameroon : NGO_ MFI having licenses Microcredit Regulatory Authority ( MRA), commercial and specialized banks, Government sponsored microfinance program(e.g. through BRDB, cooperative societies and programs under different ministries). Though micro finance started in the ages in Bangladesh, micro finance received momentum after 1990s. a large number of micro finance institutions are providing collateral free loan to the marginalized people which has made microfinance credit attractive to them. Though more than thousands of microfinance institutions are currently operating in Bangladesh, 10 large MFIs and Grameen Bank have market share of as much as 87% in terms of saving mobilization and 81% in terms of total credit disbursement (Haque and Rashid 2012). As of June 2014, 697 NGO_MFIs have taken license from micro credit regulatory authority, formerly foreign donor driven MFIs have now increase their reliance on local fund providers. As of June 2014, a foreign donor contributes only 2.14% of the total funding of MFIs (MRA 2014).
Initially micro finance institutions were set up through state backed subsidized financing and were controlled by the state. With evolution, MFIs now get benefits from the introduction of mutual funds as part of shareholders structure and /or the connection of such organization with capital market. These evolutions in funding have major implications on capital structure, operations, and associated performance of micro finance. According to cooperate governance theory, more debts exert more pressure on management to enhance efficiency and profitability as well as performance of firms to honor the debt obligation. Thus, it seems appropriate to exploit how capital structures of micro finance institutions affect their performance.
1.2 Background to the Study:
Since independent, the government of Cameroon has embarked on several attempts aimed at promoting agricultural development in the country. In the first few years after independence in1961: the government embarked on a policy of “Green Revolution’’ which aimed at encouraging the development of agriculture in the country (Simarski, 1992). Other effort includes the setting up of agencies like the National Funds for Rural Development (FONADER) and other rural agricultural programs. In spite of all this attempts, much is still needed to boost this sector, which is considered a very vital in the economic life wire of the state. A recent development in this sector has been the increase involvement of NGOs and the microfinance institutions in the process of enhancing the development of informal sector.
Moreover, recent years have seen a growing push for transparency in microfinance. An important aspect of this trend has been the increasing use of financial and institutional indicators to measure the performance of micro finance institutions.
Historically, microfinance has been successful in reaching out to the population excluded from the classical financial system. In the 90s, effort has been concentrated towards financial and institutional sustainability of the microfinance institutions. Tools to evaluate financial performance have been developed but the social performances were taken for granted.
However, donors and social investors ask the MFIs to justify the funding’s; who are the clients targeted? How can we combine social and financial objective? How do we avoid mission drift? Some MFIs themselves have the intuition that reinforcing social performance can lead on the mid run, to strengthen financial sustainability. Some initiatives have flourished, trying to identify new indicators that could be used to assess the social process followed by the MFIs.
In Cameroon, studies carried out on MFIs capital structure are rare. Monkam et al (2001), shows through thefinancial ratios that, IMFs are viable even the cost of money is expensive. However, Monkam? S study is focus on financial aspect to the detriment of social objectives. Likewise, Djeuda and Heidhues (2005) have done the growth stimulations of Cameroonians Mutual Growth by using cobb_Douglas production function in the cost behavior analysis. But their studies are just based on structured growth, without seeking to know if credit granted towards the poor is effective. Therefore, we are based on this lack of research on social performance on MFIs to structure our argumentation. It’s important to look at it because even though the government promotes informal sector through different institutions, micro finance institutions are not leaving any stone unturned to make sure that acute poverty striking the poor population is readdressed.
1.3 Statement of problem
Regarding the fact that there exist significant capital structure constraints, the growth of micro finance programs remains a tough challenge facing the microfinance sector. Besides, it undoubted those micro finance institutions have varying degree of financial performance.
Donor organizations and government stress financial performance as a means to exploit outreach width urging the MFUs capital structure is critical for higher performance and sustainability. Studies on the impact of capital structure for Cameroon on firms’ performance have been insufficient and scare: such studies have been done in most cases on developed economies. Understanding the impact of MFIs capital structure and its composition on financial performance, whose knowledge largely misses in the literature, constitute a knowledge gap in Cameroon hence studying the arena is of absolute importance.
1.4 Research Questions
Research questions are questions intended to guide the researcher on how to carry out the research in the field and how to bring the literature review.
1.4.1 Main Research Question
What is the impact of capital structure on the financial performance of MFIs in Cameroon?
1.4.2 Specific Research Questions
What is the impact of equity finance on the financial performance of MFIs?
What is the impact of debt funding on the financial performance of MFIs?
What is the impact of grant funding on the financial performance of MFIs?
1.5 Research objectives
The main research objective of this study is to determine the impact of capital structure on the financial performance of micro finance institutions in Cameroon.
The specific objectives:
To find out the impact of equity financing on the financial performance of MFIs.
To assess the effect of debt financing on the financial performance of MFIs.
To determine the relationship between grant funding and financial performance of micro finance institutions.
1.6 Research Hypothesis
Ho: capital structure has no significant impact on the financial performance on MFIs.
HI: Capital structure has a significant impact on the financial performance of MFIs.
HO: Equity finance has no impact on the financial performance of micro finance institution.
HI: Equity finance has an impact on the financial performance of MFIs.
HO: Debt funding doesn’t have an effect on MFI performances
HI: Debt funding has an effect on the MFI financial performance
HO: Grant funding doesn’t have an impact on the financial performance of MFIs
HI: Grant funding has an impact on the financial performance of MFIs
1.7 Significant of study
This project titled “The Impact of Capital Structure on the Performance of Micro Finance Institutions in Cameroon” taking the case study of CAMCCUL, MC2 and CCA is of great significant to:
Business men: in that it will widen their knowledge in capital structure thereby fostering their growth and progress in their businesses.
University of Buea: it will serve as a partial requirement in the awarding of a bachelor’s degree to their students when it’s completed and supervised.
This study wills assist in widening the knowledge of capital structure analysis in the university both to teachers and students.
MFIs management: this will help them to assess their current capital structures in relation to performance and make possible adjustments.
Again, to MFIs it helps them gain favour in the eyes of their investors since a good manage of their capital will mean a management of shareholders wealth which is invested in that sector.
To the General Public: this will create proper awareness for young entrepreneur’s to know that it’s not all about having capital to open a business that may fail but to know how to manage that capital to the full less to gain an optimal performance level that will be able to yield profit as time goes by.
Finally to other researchers: this piece of work will act like a reference to them and also act like a guide in coming out with their own projects went time comes.
1.8 Scope of Study
This piece of work is restricted only to micro finance institutions in Cameroon. Logically, since Cameroon is a developing country. It is assumed that a good percentage of microfinance institutions have common characteristics. This study focuses basically on three MFIs; CamCCUL, MCs and CCA the results are generalized by implication to all the microfinance institution in the country.
The various source of capital includes loans, saving, deposits, retained earnings, subsidies, provisions, bonds, debentures, depreciations and shares (Hill, 2008). However, considering the nature of microfinance institutions, the researchers will base his studies on: equity, loans and subsidies as elements of capital structure. This study will therefore not cover bonds debentures and depreciations as elements of capital structure.
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