Abstract:
Microfinance institutions (MFI) play a crucial role in economic development and
financial inclusion. Financial sustainability is the key to the growth of microfinance
institutions which indicates its importance. Therefore, the current study
investigated the effect of financial leverage on MFI’s financial sustainability. The
specific objective was to establish the effect of financial leverage on the financial
sustainability of MFIs. The study was guided by the agency theory and life-cycle
theory. It adopted an explanatory research design where a panel approach was used
as well as the positivist paradigm. The study adopted the census approach method.
Panel data was drawn from 30 MFIs for the period 2010-2018 from the MIX market
database using the data collection schedule. The study used both descriptive and
inferential statistics to analyze the data with the help of STATA software. A fixed
effect model based on the Hausman test (X 2 = 45.41, p= 0.000 ≤ 0.05) was used.
The findings indicated that financial leverage (β1 = 0.27, p − value = 0.001) has
a positive and significant effect on the financial sustainability of MFIs. The authors
recommend MFIs’ managers to engage in the prudent use of financial leverage so
that they may enhance their overall profitability and boost investor confidence
through their strategic decision-making resulting in financial sustainability. The
results/findings have implications for business managers and policymakers given
the vital role in service delivery and the challenges hindering the sector from the
realization of financial sustainability in the economy.
