THE IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF MICRO FINANCE INSTITUTION IN ETHIOPIA

Abstract

This study tries investigating the impact of capital structure on the profitability of MFI in Ethiopia. In order to achieve the objective explanatory research design and quantitative research approach was used. Data has been collected from a secondary source of twenty four selected MFI in the sample covering the period from 2010 to 2021. MFI specific and macroeconomic variables were analyzed by using the balanced panel fixed effect and random effect regression model. When ROA is the dependent variable, the findings of the study revealed that Debt to asset ratio, GDP and inflation has positive and statistically significant impact on profitability of ROA while size of MFI and Debt to equity ratio has negative and statistically significant effect on profitability of ROA. When ROE is dependent variable, Debt to equity ratio has positive and significant impact on profitability of MFI while Debt to asset ratio and size of MFI has negative significant impact on the profitability of MFI. However, asset tangibility and age are not significant on the ROA and asset tangibility, age, GDP and inflation have no statistically significant effect on the profitability of ROE in MFI. Thus, the study suggests that Debt to equity and Debt to total asset ratio result indicates MFI need more debt to raise the profitability of the MFI and the size of MFI result leads us to change the administrative management style to improve profitability of the MFI.