The purpose of this study is to investigate the moderating effects of the organizational environment on the relationship between capital structure and rural banks' performance. The samples have been collected from 241 rural banks of Central Java for the present study to analyze the moderating effects, and data are collected through its Financial Services Authority (FSA) website. Moderating Regression Analysis (MRA) is used to evaluate the impact of moderation. The capital structure as measured by the ratio of total debt to total assets and total equity both have a significant negative effect on ROA and ROE. The effects of savings and loans have a negative impact on ROA and ROE. While, debt in other forms has no significant effect. Thus, the increase in savings and loans can reduce the performance of rural banks. The effect of organizational environment moderation on the relationship between capital structure and the performance of rural banks shows different results: (1) environment munificence has a positive moderation effect on the relationship between capital structure (total debt, savings and loan) and ROE; (2) environmental dynamism has a positive moderation effect on the relationship between capital structure (total debt, savings and loan) and ROA; (3) environmental complexity has a positive moderation effect, especially on the relationship between other debt and ROE. Contribution/ Originality: This paper contributes to the existing capital structure literature, particularly on microfinance. Furthermore, this study provides a unique contribution to the management of microfinance in controlling the debt that is adjusted to the environmental conditions of the organization.
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