Determinants of capital structure for the projects funded by international financial institutions: the case of IFAD projects

Abstract

This study seeks to establish determinants of capital structure for the projects funded by international financial institutions using IFAD projects as case studies. Specifically, we seek to find out the determinants of capital structure for projects funded by IFAD; the correlation between the life span of the project and its total budget; the correlation between the total capital and the number of households directly benefiting from the project; and the correlation between the country’s capacity of mobilizing loans and grants with its level of political stability, level of accountability, government effectiveness and the control of corruption. Data from 81 projects funded by IFAD between 1999 and 2011 in Sub-Saharan Africa (SSA), Middle-East and North Africa (MENA) region, Asia and South America was collected. The determinants were then examined from the distinctions of firm specific and country specific groupings and analyzed using a least-square dummy variable (LSDV) approach to reveal the regional-effects. The correlation analysis revealed that the association between total capital and the duration of the project is insignificant ( ) whereas between the total capital and the number of beneficiary households is highly and positively correlated with and . In addition, correlation between total capital and the level of Political Stability, the Voice and Accountability, and the level of Corruption is insignificant. Moreover, the results of LSDV showed that the number of benefiting household is a highly significant determinant of the NPOs capital structure ( ) together with Voice and Accountability ( ) as well as Corruption ( ). In contrast, project duration and the level of political stability were not important determinants of capital structure. The results of this analysis provide confirmatory evidence that the size of the project has a highly positive effect on the size of the capital, but significantly negative on the ability to borrow whereas only voice and accountability together with control of corruption have a significant relationship with the ability to mobilize capital for the project. Therefore, we conclude that the corporate capital structure theory, that is mostly applied in the business firms, is still applicable in iv project finance but with exceptions. Therefore, we implore that more studies should be done focusing on different types of NPOs to firmly understand the determinants of debt in NPOs.