EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE OF LISTED COMMERCIAL BANKS IN KENYA. A CASE STUDY OF KENYA COMMERCIAL BANK LIMITED
The study examined the effects of Capital structure on financial performance of listed commercial Banks in Kenya, a case study of Kenya Commercial Bank Limited. Most studies on capital structure were conducted in European countries, Middle-east and in the United States and found inconsistencies on the effects of capital structure on the financial performance of the firms. In Kenya studies done on capital structure and financial performance concentrated on the effect of capital structure on microfinance institutions, industrial firms and allied sectors. It is important to distinguish the banking sector from the general financial sectors and other sectors. Banks in general, operate under a totally unique and rigorous set of regulations which only apply to that sector making it impossible to explain the relationship of both the banking market and the rest of the market. The banking sector is fundamentally different from any other sector of the market in terms of high leverage and regulation, therefore the results obtained from Research using data across other sectors in the market need not to be carried over to the banking sector. Further, Research on the effect of capital structure and Kenyan Financial sector performance were very scarce. The banking industry being a key pillar in the financial industry and economy as a whole needed to be studied in this context. The inadequate studies and inconsistencies of effects of capital structure created a knowledge gap which motivated this study. The findings of this research study will help the Management of Kenyan Commercial Banks, investors, shareholders, scholars, Government of Kenya, Nairobi Stock Exchange and Capital Market Authority by providing insight on effect of capital structure on financial performance of listed commercial banks in Kenya. Capital structure theories; (irrelevance theory of capital structure, the Trade-off theory, the pecking order theory and the agency cost theory have been explored) and predict that leverage level influences a listed commercial banks' financial performance. This study has considered returns on assets and return on equity ratios as essential financial performance indicators. The effects of capital structure variables; deposits, debts, retained earnings and equity on financial performance of listed commercial banks in Kenya were therefore measured using these indicators. This study adopted descriptive research design. The study is a case study of Kenya commercial bank limited. Therefore the overall annual financial reports of 230 branches of Kenya Commercial Bank limited formed the target population. The main source of data for the study was Secondary data. The financial and income statements panel data covering five-year period from 2009 to 2013 was summarized and ratios calculated and analyzed using SPSS version 21 to produce inferential statistics using multiple regression analysis so as to determine the relationships between dependent and independent variables. The multiple regression models used considered performance as the dependent variable and was measured in terms of ROA and ROE. The results from the regression analysis indicated that Deposits, debt and equity was negative and significantly related to financial performance of listed commercial banks in Kenya as measured by return on assets. The regression analysis results indicated that the relationship between Retained Earnings ratio was positive although insignificantly related to financial performance as measured by return on assets. It was therefore was concluded that capital structure of listed commercial banks in Kenya is significant and affects financial performance of commercial banks negatively. Therefore various stakeholders in this industry should strive to carry out researches in other areas in order to be able to identify which are the major factors that affect the performance of their industry.
Key Words: Capita Structure, Financial Performance, Commercial Banks
Abor, J. (2005). The effect of capital structure on profitability: an empirical analysis of listed firms in Ghana. [Article]. Journal of Risk Finance (Emerald Group Publishing Limited), 6(5), 438-445. doi: 10.1108/15265940510633505.
Abor, J. (2007). Debt policy and performance of SMEs. [Article]. Journal of Risk Finance (Emerald Group Publishing Limited), 8(4), 364-379.
Awunyo-Vitor D. & Badu J. (2012). Capital Structure and Performance of Listed Banks in Ghana Global Journal of Human Social Science: Global Journals Inc. (USA) Online ISSN: 2249-460x & Print ISSN: 0975-587X.
Banks Industry Profile report (2009). Banks Industry Profile: Global, 1.
Barclay, M. J., & Smith, C. W. (1995). “The Maturity Structure of Corporate Debt”, Journal of Finance 50, 609-32.
Berk, J., & DeMarzo, P. (2007). Corporate finance. Boston: Pearson/Addison Wesley.
Berger, A. N., & Bonaccorsi-diPatti, E. (2006). Capital structure and firm performance: a new approach to testing agency theory and an application to the banking industry. Journal of Banking and Finance, 30(4), 1065-1102.
Business dictionary. (2015). Definition. Retrieved from www.businessdictionary.com, 17th Feb, 2015.
CBK Prudential Guidelines, (2013). Central Bank of Kenya.
Calabrese T. D. (2011). Testing Competing Capital Structure Theories of Nonprofit Organizations. Journal of Public Financial Publications, Inc.
Cekrezi A. (2013). European Journal of Sustainable Development, 2, 4, 135-148 ISSN: 2239- 5938.
Chisti K., Ali K., & Sangmi M. (2013). The USV Annals of Economics and Public Administration Volume 13, Issue 1(17).
Dietrich, A., & Wanzenried, G. (2009). Determinants of bank profitability before and during the crisis: Evidence from Switzerland. Journal of International Financial Markets, Institutions and Money, 21(3), 307-327.
European Central Bank, (2010). Beyond ROE, How to Measure Bank Performance.
Flannery, M., & K. Rangan. (2008). Market Forces at Work in the Banking Industry: Evidence from the Capital Buildup from the 1990s. Review of Finance 12:391–429.
Gleason, K. C., Lynette, K M., & Ike, M. (2000). The Interrelationship between culture, capital structure, and performance: Evidence from European retailers. Journal of Business Research, 50(2), 185–191. http://dx.doi.org/10.1016/S0148-2963(99)00031-4.
Gropp, R & Heider, F, (2009). The Determinants of Capital Structure, Working Paper Series. European Central Bank, No I096.
Gul, S., Irshad F., & Zaman, K. (2011). Factors affecting bank profitability in Pakistan, Romanian Economic Journal Year XIV, No 39 pages 61-87.
Ibrahim, E.E. (2009). The impact of capital-structure choice on firm performance: Empirical evidence from Egypt. Journal of Risk Finance, 10(5), 477-487.
Jensen M.C. (1986). Agency costs of free cash flow, corporate finance and takeovers. American Economic Review, 76:323-329.
Jensen M.C., & Meckling, W. (1976). Theory of the firm: Managerial behavior, agency cost and capital structure. Journal of Financial Economics 3 (3), 305-360.
Jermias J. (2008). ‘The relative influence of competitive intensity and business strategy on the relationship between financial leverage and performance’, The British Accounting Review, vol.40, pp. 71-86.
Kanwal, I. K. (2012). Effect of Dividends on Stock Prices– A Case of Chemical and Pharmaceutical Industry of Pakistan. Management, 2(5), 141- 48.
Kamau, R. G. (2009). Effects of Change in Capital Structure on Performance of Companies Quoted in NSE. University of Nairobi.
Kenya Commercial Bank report (2013). Kenya Bank Credit Rating Report: Public Credit Rating http://www.globalratings.net as retrieved on 14 February 2015.
Kester (1986), Capital and ownership structure: A comparison of United States and Japanese manufacturing corporations, Journal of Financial Management, pp 5-16.
Khan, A. B., & Zulfiqar, A. S. (2012). The Impact of Retained and Distributed Earnings on Future Profitability and Stock Returns in Pakistan. International Research Journal of Finance and Economics, 121-32.
Kibet, L. (2009). Relationship between capital structure and profitability of MFIs in Kenya. Unpublished MBA project. University of Nairobi.
Kyereboah-Coleman, A. (2007). The impact of capital structure on the performance of microfinance institutions. [Article]. Journal of Risk Finance (Emerald Group Publishing Limited), 8(1), 56-71.
Lislevan J. C. (2012). The effect of capital structure on microfinance institutions performance University of Agder Faculty of Economics and Social Sciences.
Maina, L., & Kondongo, O. (2013). Capital Structure and Financial Performance in Kenya: Evidence from Firms Listed at the Nairobi Securities Exchange. Paper Presented at the Jomo Kenyatta University of Science and Technology Research Conference, Kenya. Makau, C. (2006). Effect of capital structure on firm value: evidence from Nairobi stock exchange. Financial Review Paper. Nairobi , Kenya.
Manawaduge, A., Zoysa, A. D., Chowdhury, K., & Chandarakumara, A. (2011). Capital structure and firm performance in emerging economies: An empirical analysis of Sri Lankan firms. Corporate Ownership & Control, 8(4), 253–263.
Margaritis, D., & Psillaki, M. (2010). Capital structure, equity ownership and firm performance. Journal of Banking & Finance, 34(3), 621–632. http://dx.doi.org/10.1016/j.jbankfin. 2009.08.023.
Mesquita, & Lara (2003). ‘Capital structure and profitability: The Brazilian case’, Working paper, Academy of Business and Administration Sciences Conference, Vancouver, July 11-13.
Miles M. B., & Huberman, M. A. (1994). “Qualitative Data Analysis: An Expanded Sourcebook” (2nd edition). Beverley Hills, Sage.
Miller, M. (1995). Do the M&M Propositions Apply to Banks? Journal of Banking and Finance 19:483–89.
Modigliani F., & Miller M.H. (1958). The cost of capital, corporation finance and the theory of investment, American Economic Review, Vol. 48 No.3, pp.261-97.
Modigliani F., & Miller M.H. (1963). Corporate income taxes and the cost of capital: A correction. American Economic Review, 53(2):433-443.
Munene, K.H., (2006). Impact of profitability on capital structure of companies listed at NSE . (Unpublished MBA). University of Nairobi, Nairobi.
Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), 81-102.
Myers S.C., & Majluf N. (1984). Corporate Financing and Investment Decisions; when Firm have Information that Investors do not Have. Journal of Financial Economics, Vol. 13 pp.187- 221.
Ondiek, B. (2010). The relationship between capital structure and financial performance of firms listed at NSE. (Unpublished MBA). University of Nairobi, Nairobi.
Orua E. (2009). The Relationship between capital structure and financial performance of micro finance institutions in Kenya, University of Nairobi.
Pandey, I. M. (2009). Financial Management: Capital Structure Planning and Policy (pp. 332,333).
PWC. (2013). Growing in an uncertain world South Africa – Major banks analysis PwC analysis of major banks’ results for the reporting period ended 31 December 2012.
Ramakrishnan R., & Thakor A. (1984). Information Reliability and a Theory of Financial Intermediation.Review of Economic Studies 51:415–32.
Ratnovski, L., & Huang, R. (2009) Why are Canadian Banks more resilient; IMF working paper number WP/09/152.
Ross, S. A., Westerfield, R. W., Jaffe, J., & Kakani, R. K. (2009). Corporate Finance, Tata McGraw- Hill Edition 2009, 8th Edition.
Saad, N. M. (2010). Corporate Governance Compliance and the Effects to Capital Structure. International Journal of Economics and Financial, 2(1), 105-114.
Salazar, L.A., Soto, C.R., & Mosqueda, E.R. (2012).The Impact of Financing Decisions and Strategy on Small Business Competitiveness. Global Journal of Business Research, 6(2), 93-103.
Saunders, N. K., Thornhill, A., & Lew, P. (2009). Research Methods for Business Students (5th Ed ed.).
Sekaran, U., & Bougie, R. (2010). Research Methods for Business: A Skill Building Approach (5th ed.). Hoboken, N.J./Chichester: John Wiley and Sons.
Scott S.M., & Timothy W. K. (2006). Management of Banking, (6th ed.). Pre-press company, Inc.
Seoh, G, W. (2012). ROE: An Appropriate Measure of Bank Performance? Weekly Financial Review, Vol. 21, No 15.
Silva, M. (2008). The effect of capital structure on microfinance institutions performance. Master's thesis, University of Agder, Kristiansand.
Shahjahanpour A., Ghalambor, H., & Aflatooni A. (2010). The determinants of capital structure choice in the Iranian companies. International Research Journal of Finance and Economics,56,167-178.
Shubita, M. F., & Alsawalhah, J. M. (2012). The relationship between capital structure and profitability. International Journal of Business and Social Science, 3(16), 104-112.
Skerritt, P. (2009). The financial landscape. In Z. B. C. Van Zyl, P. Skerritt & I. Goodspeed (Ed.), Understanding the South African financial markets (3rd ed.). Pretoria: Van Schaik Publishers.
Skopljak, V. (2012). Capital structure and firm performance in the financial sector: Evidence from Australia. Asian Journal of Finance and accounting, 4 (1) 278-94.
Taani K. (2013). Capital Structure Effects On Banking Performance: A Case Study Of Jordan International Journal of Economics, Finance and Management Sciences; Published online Septembe20, 2013 (http://www.sciencepublishinggroup.com/j/ijefm).
Uremadu, S. O., & Efobi, R. U. (2012). The impact of capital structure and liquidity on corporate returns in Nigeria: Evidence from manufacturing firms. International Journal of Academic Research in Accounting, Finance and Management Sciences, 2(3), 1-16.
Velnampy, T., & Niresh, J. A. (2012). The relationship between capital structure & profitability. Global Journal of Management and Business Research, 12(13), 67-73.
Wilson, N., Wright, M., Siegal, D. & Scholes, L. (2012). ‘Private equity portfolio company performance during the recession’, Journal of Corporate Finance, Vol. 18, No. 1, pages 193205.
Zeitun, R., & Tian, G. G. (2007). Capital structure and corporate performance: Evidence from Jordan. TheAustralasian Accounting Business and Finance Journal, 1(4), 40–61.
- There are currently no refbacks.