Determinants of capital structure at UGAFODE microfinance limited (MDI)

Abstract

In the finance literature determinants of Capital structure have been widely debated. Previous studies have mainly focused on microeconomic determinants and research on the Small and Medium Enterprises in Uganda leaving microfinance institutions with a gap or space. The question of what determines the best financing mix that maximizes a firm’s value is still the most debatable issue in corporate finance. Besides, a great deal of previous studies focused mainly on developed countries’ non-financial firms paying little attention to developing countries and financial sector. Therefore, this study attempted to fill the gap by analyzing the capital structure for Microfinance Institutions in Uganda. This paper approached the issues of capital structure by evidencing UGAFODE Microfinance Limited (MDI) in Uganda to uncover the determinant factors of capital structure. To discover what determines capital structure, six explanatory variables (Ownership, Default risk, Profitability, Size, Growth, Age and Tax Shield) were selected and a descriptive analysis was done. The major findings of the study indicated that equity and debt are the major sources of funding for UGAFODE. Profitability, ownership, age and tax-shield were the significant determinants of capital structure in UGAFODE. Credit rationing and issuing debt and equity were selected as the major strategies to optimize the capital structure. In addition to this, pecking order theory and agency theory were used to explain the study. We consider our findings to be in line with overall expectations and believe we add further knowledge which can be applied to the Ugandan business environment. Keywords: Capital Structure, Determinants, UGAFODE, Profitability, Ownership, Growth, Age and Tax-Shield