Determinants of capital structure in pride microfinance limited Uganda

Abstract

Although there have been many prior studies of the determinants of capital structure, 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 Pride Microfinance Institutions (PML) in Uganda to uncover the determinant factors of capital structure. The population of the study was 40 respondents which gave us a sample of 36 respondents using Morgan & Krejcie table (1970). Data was collected from respondents at Pride Microfinance Limited head office. 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 PML. Profitability, ownership, age and tax-shield were the significant determinants of capital structure in PML. 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 Static Trade-off theory were used to explain the study. Keywords: Capital Structure, Determinants, Pride Microfinance Ltd, Profitability, Ownership, Growth, Age and Tax-Shield