ABSTRACT This study investigates how debt affects free cash flow (FCF) and financial performance in microfinance institutions (MFIs). Drawing on a global sample of 484 rated MFIs across 74 countries and applying static and dynamic panel models, the analysis shows that total debt reduces FCF, with short‐term debt exerting the strongest effect. At the same time, debt enhances operational efficiency by lowering costs and increasing operating profits. However, these gains are offset by higher funding expenses, resulting in reduced overall financial performance. The findings suggest that while debt can serve as a disciplinary mechanism in MFIs, excessive reliance on it risks undermining financial sustainability.
Zhang et al. (2026) studied this question.