Abstract

The paper examines the relationship between capital structure, credit risk management and financial performance of microfinance institutions (MFIs) in Uganda based on agency theory. The study adopted a cross–sectional research design to examine 64 MFIs in Uganda. Correlation and multiple regression analysis were performed to analyze the data. The results reveal that credit risk management significantly contributes to sound financial performance. Second, capital structure is not significantly related to financial performance. Therefore, credit risk appraisal, credit risk monitoring and credit risk mitigation are essential in achieving sound financial performance of MFIs. However, the structure of debt or equity does not necessarily affect financial performance. Hence, managers should endeavor to instill risk preventive and control mechanisms so as to mitigate credit risks and achieve positive financial performance of MFIs.

Key words: Agency theory, capital structure, credit risk management, financial performance, microfinance institutions.