The Capital Structure of Microfinance Borrowers: A Dynamic Market Segmentation Analysis

ABSTRACT This paper studies the capital structure of businesses supported by microcredit based on the pecking order theory (POT) using dynamic market segmentation. It analyses secondary data on the Crediamigo program. Then it estimates latent class Markov models to perform a dynamic segmentation of the customers. The analyses indicate that the structure of the business capital based on microcredit is in line with POT's principles due to prioritizing equity capital when contracting loans. Furthermore, the higher the profit, the lower the debt. Distinct segments of clients show different capital structures. Probabilities of moving across these segments over time also estimated. This study highlights practical implications for microfinance institutions based on the beneficiaries' varying indebtedness conditions and demonstrates the impacts of indebtedness on both the business and the family. Moreover, it reveals new empirical evidence regarding formal and informal business capital structure supported by microcredit programs and identifies the pattern of these structures and their likelihood of transition across different economic conditions.