The mediating role of cost of capital in the relationship between capital structure and loan portfolio quality
African Journal of Economic and Management Studies
ISSN: 2040-0705
Article publication date: 15 November 2021
Issue publication date: 15 February 2022
Abstract
Purpose
The purpose of this paper is to establish the mediating role of cost of capital in the relationship between capital structure and loan portfolio quality in Uganda's microfinance institutions (MFIs).
Design/methodology/approach
A cross-sectional research design was adopted to collect data and partial least squares structural equation modelling was used to test the study hypotheses.
Findings
Cost of capital partially mediates the relationship between capital structure and loan portfolio quality. Hence, cost of capital acts as a conduit through which capital structure affects loan portfolio quality.
Research limitations/implications
Cost of capital was generalized as financial and administrative costs. The impact of costs like dividend pay-outs, interest rates and/or loan covenants on loan portfolio quality could be investigated individually.
Practical implications
MFIs should be vigilant about loan recovery by using strategies like credit rationing to ensure timely repayments.
Originality/value
The study contributes to the ongoing academic debate by identifying the significant indirect role of cost of capital in explaining loan portfolio quality.
Keywords
Acknowledgements
The author acknowledges the support of German Academic Exchange Service (DAAD) for the PhD scholarship (in region/in country). It is this scholarship that made this research possible.
Citation
Agasha, E., Kamukama, N. and Sserwanga, A. (2022), "The mediating role of cost of capital in the relationship between capital structure and loan portfolio quality", African Journal of Economic and Management Studies, Vol. 13 No. 1, pp. 49-61. https://doi.org/10.1108/AJEMS-02-2021-0084
Publisher
:Emerald Publishing Limited
Copyright © 2021, Emerald Publishing Limited