The impact of capital structure on profitability of Commercial Banks in Ethiopia (original) (raw)
Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks
Risks, 2024
This study aimed to examine the effects of capital structure on the financial performance of Ethiopian commercial banks. The dependent variable, financial performance, is measured by Return on Assets (ROA), while factors such as loan-to-deposit ratio (LDR), asset-to-total equity ratio (ATER), total deposit-to-total asset ratio (TDTAR), capital adequacy ratio (CAD), and asset growth ratio (GA) were used as proxy independent variables to gauge capital structure. Using a quantitative approach and an explanatory research design, this study analyzes 6 years of audited financial reports from 14 commercial banks in Ethiopia. This investigation employs a random effect regression model and Stata 14 software package to explore the relationships among these variables. The result revealed that both the loan-to-deposit ratio and the total deposit-to-total asset ratio have a positive and significant impact on financial performance, while the asset growth ratio showed a negative effect. Based on these findings, this study recommends that bank authorities concentrate on bolstering their deposit base, managing asset growth efficiently, maintaining adequate capital levels, and optimizing leverage levels to improve financial performance and ensure long-term sustainability in the banking sector. Additionally, this research is anticipated to inform policymakers about regulatory frameworks for banks and assist banking managers in formulating effective capital financing strategies within the Ethiopian commercial banking sector, thus enriching the existing literature on the relationship between capital structure and financial performance.
2016
Abstract- The main intention of this study was to examine the relationship between capital structure and performance of commercial banks in Ethiopia. The investigation was based on pannel data (from the year 2000-2012) collected from the annual reports of eight sample commercial banks in the country. This study establish a model to measure the association between capital structure which is proximate by total debt to total asset (TDTA) and total debt to total capital (TDTC) and performance which is measured by return on asset (ROA), return on equity (ROE) and net profit margin (NPM). The results of regression analyses indicate that on average leverage has a positive effect on the financial performance of commercial banks in Ethiopia when performance measured by return on equity. In contrast, the similar analyses indicate that leverage has a significant negative effect on performance of commercial banks in Ethiopia when performance is measured by return on asset and net profit margin....
Does Capital Structure Matter on Performance of Banks ? ( A Study on Commercial Banks in Ethiopia )
2016
The main intention of this study was to examine the relationship between capital structure and performance of commercial banks in Ethiopia. The investigation was based on pannel data (from the year 2000-2012) collected from the annual reports of eight sample commercial banks in the country. This study establish a model to measure the association between capital structure which is proximate by total debt to total asset (TDTA) and total debt to total capital (TDTC) and performance which is measured by return on asset (ROA), return on equity (ROE) and net profit margin (NPM). The results of regression analyses indicate that on average leverage has a positive effect on the financial performance of commercial banks in Ethiopia when performance measured by return on equity. In contrast, the similar analyses indicate that leverage has a significant negative effect on performance of commercial banks in Ethiopia when performance is measured by return on asset and net profit margin. These sup...
Research Square (Research Square), 2023
The study intends to examine the literature on factors in uencing capital structure decisions of commercial banks in Ethiopia in order to identify existing gaps and the degree of existing research in the subject, as well as to provide direction for future research. Due to a lack of studies for the stated review and access to the known database, the review was conducted utilizing eleven relevant and available scholarly papers that were published in any time period, primarily using open search engines and databases. To identify the articles, various key words were employed. The PRISMA framework was used to analyze the capital structure decisions study work. The review protocol outlined the inclusion and exclusion criteria. The descriptive analysis was performed based on different parameters to arrive at conclusions. The ndings revealed that most of the variables of interest explored in the studies contradicted each other and the previous literature variables. The capital structure studies were conducted by considering few variables, and most of the studies were not cited. The ndings regarding the theories supported by factors affecting the capital structure decisions of commercial banks in Ethiopia were contradictory and not justi ed. The banking literature still doesn't cover the capital structure of banks very much. There is currently a lack of clarity regarding how banks determine their capital structure and what variables affect their corporate nancing behaviour. Therefore, it is recommended that the concerned body conduct an in-depth study of the decisions banks make about their capital structure by identifying pertinent elements.
THE IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF COMMERCIAL BANKS IN GHANA
The study examined the effect of capital structure (measures as short term debt ratio, long term debt ratio, and total debt ratio) on profitability (measured as Return on Assets and Return on equity) of commercial banks in Ghana. The study sampled 23 banking over a six year period from 2010 to 2015 and extracted data from the annual of these banks. Data was analysed using descriptive statistics, correlation analysis as well as panel regression analysis. The results showed that banks in Ghana are highly leveraged with debt financing constituting 84% of total capital out of which 77% is short term debt despite the increase in minimum equity capital of these banks. The regression analysis revealed that short term debt ratio and long term debt ratio are negatively related with profitability of banks in Ghana. However, total debt ratio was positively associated with profitability of Banks in Ghana. On the control variables, firm size, foreign ownership and age of the bank were positively associated with banks profitability whiles growth in customers' deposits was negatively associated with banks' profitability. The results show that commercial banks in Ghana reliance on short term financing (deposits) reduces banks profitability and as such banks should shift their financing focus from deposits to other sources. The results call for firms to choose the right mix of short term and long term debt that will maximize profitability of bank. Contribution/ Originality: The study contributes to literature by examining the impact of capital structure on banks profitability in the context of regulated equity capital for commercial banks both listed and non-listed. The study is among the few capital structure and performance studies on banks is developing countries. The study serves as a basis for future research into the right mix of capital for commercial banks in Ghana that will enhance profitability.
Capital Structure and Profitability in Ghanaian Banks
SSRN Electronic Journal, 2010
We studied capital structure and profitability in Ghanaian banks using panel data methodology was employed. Capital structure theories have been utilised to provide the theoretical basis for the work. The study covered 14 banks over the period 1997-2006. it was observed that 87% of the total capital of banks in Ghana is made up of debt. Of this, 65% constitute short-term debts while 22% is made up of long-term debts. This has re-emphasised the fact that banks are highly levered institutions and also highlights the importance of shortterm debts over long-term debts in bank financing in Ghana. This finding agrees with previous studies such as and Amidu (2007) in stressing the importance of shortterm debt in firm financing in Ghana. This significant negative relationship between bank size and profitability suggests that larger banks tend to exhibit lower margins and is consistent with models that emphasize the negative role of size from scale inefficiencies.
Research Square (Research Square), 2023
The study intends to examine the literature on factors in uencing capital structure decisions of commercial banks in Ethiopia in order to identify existing gaps and the degree of existing research in the subject, as well as to provide direction for future research. Due to a lack of studies for the stated review and access to the known database, the review was conducted utilizing eleven relevant and available scholarly papers that were published in any time period, primarily using open search engines and databases. To identify the articles, various key words were employed. The PRISMA framework was used to analyze the capital structure decisions study work. The review protocol outlined the inclusion and exclusion criteria. The descriptive analysis was performed based on different parameters to arrive at conclusions. The ndings revealed that most of the variables of interest explored in the studies contradicted each other and the previous literature variables. The capital structure studies were conducted by considering few variables, and most of the studies were not cited. The ndings regarding the theories supported by factors affecting the capital structure decisions of commercial banks in Ethiopia were contradictory and not justi ed. The banking literature still doesn't cover the capital structure of banks very much. There is currently a lack of clarity regarding how banks determine their capital structure and what variables affect their corporate nancing behaviour. Therefore, it is recommended that the concerned body conduct an in-depth study of the decisions banks make about their capital structure by identifying pertinent elements.
Determinants of Capital Adequacy of Commercial Banks in Ethiopia
2017
This thesis aimed to see the determinant factors for capital adequacy using 14 selected banks operating in Ethiopia from 2011 to 2015. The paper conducted different estimation to see the relationship between the dependent variable, Capital Adequacy Ratio (CAR) and independent Variables which include Bank size (SIZE), DAR (Deposit to Asset Ratio), Loan to Asset Ratio (LAR), Loan to Deposit (LTD), Return on Asset (ROA), Return on Equity (ROE), Loan Loss Provision (LPR), and macroeconomic variables (gross domestic product and inflation).
International Journal of Business, Management and Economics, 2023
This study aimed to examine the impact of capital structure on bank performance using data from nine listed banks on the Ghana Stock Exchange. The study utilised secondary panel data extracted from the published financial statements of these banks. Bank performance was measured using return on assets and return on equity as proxies, while the ratio of total debt to total assets served as the independent variable. Additionally, firms' age, size, and liquidity were control variables. The random effect technique was used for analysis, employing Ordinary Least Squares (OLS) and Autoregressive methods. The results indicated a positive and significant relationship between total debt to total assets, return on assets and equity. Furthermore, firms' age positively and significantly impacted the return on assets and return on equity in both models. Interestingly, the study found a negative effect of firms' liquidity on return on assets in model one, while the size of the firms had no impact on bank performance. Policymakers can encourage financial institutions to provide accessible and affordable lending options to businesses, enabling them to leverage debt effectively. This can be particularly beneficial for small and medium-sized enterprises (SMEs) that often face challenges accessing capital.