The effect of capital structure on the financial sustainability of microfinance institutions: A meta-analysis

Considering the trend toward microfinance institutions (MFIs) commercialization that fundamentally reshapes their capital structure, this meta-analysis, by synthesizing data from a wide range of studies, aims to investigate the impact of different sources of finance on the financial sustainability of MFIs and determine the optimal order in which these sources should be utilized. In this study, 166 effect sizes were obtained from 64 studies. Overall, the findings indicate that equity and deposit financing enhance financial sustainability positively, whereas debt and donation financing exhibit an inverse relationship. However, variations exist based on the MFI charters. While equity financing adversely affects the financial sustainability of MFI banks, it also exerts positive effects on other types of MFIs. Similarly, deposit financing negatively affected MFI NGOs. Regarding financial sustainability proxies, debt and equity financing affect financial self-sufficiency (FSS) and operating self-sufficiency (OSS), unlike donation and deposit financing. Equity financing has a positive effect on OSS but a negative effect on FSS. In contrast, debt financing shows the opposite trend. The meta-regression further reveals that, as capital structure variables, the sources of finance do not significantly explain the variance in MFIs' FSS but do so for OSS. These findings have implications for managers and for future research.