Issues on Bank’s Capital Structure and Profitability: A Developing Country Context

Abstract

Purpose: The study aims to show the effect of capital structure on banks' profitability in developing countries. Design/Methodology/Approach: The study is conducted on 28 commercial banks from 2009 to 2016 of panel data to infer the concurrent relationship between capital structure and profitability. The preliminary diagnoses picked up the Generalized Methods of Moments (GMM) method to address the endogeneity issue in dynamic panel data. Findings: The study found that the bank's capital structure is negatively associated with profitability and vice versa. Moreover, asset tangibility and regulatory capital harm banks' current capital structure, whereas tax shield and 1-year lagged capital structure have a positive influence. On the contrary, a bank's profitability is positively associated with bank growth, and 1-year lagged profit, while credit risk and liquidity are negatively affected. The study implies that banks should use an appropriate mixture of debt and equity; otherwise, immature decisions in capital structure may demise banks' profitability, which will ultimately turn into bank failure. Practical Implications: Adherence to the adoption of stringent capital structure allures banks in maximizing profit to cope with market competition. Beyond the theoretical aspects, the study extends its scope in the practical implications of adopting a profit-maximizing capital structure in a developing country context. However, capital structure choice differs from bank to bank based on their performance and position in the market. The study clearly addressed some of the relevant issues which affect banks' performance adversely in practice. Originality/Value: The study contributes to the existing literature and tries to explain the role of capital structure in banks' performance, mostly in submerge economies.

The nexus between capital structure and bank’s specific factors a case of listed banks in Tanzania

“…Statistical results reveals that there is a negative insignificant relationship that exists between listed banks' capital structure and their profitability (r=-68.6%, p-value=0.910). These findings were consistent with other studies (Lemmon & Zender, 2010: Niluthpaul & Roushanara, 2021) [19,24] , but contradicted a study by (Sivalingam & Kengatharan, 2018) [32] that discovered that a negative and significant relationship between profit an total debt of 28 commercial banks in Sri Lanka. Finally, these findings contradicted a study conducted by (Alipour et al, 2013) [2] , which concluded that profitability and capital structure have a positive relationship.…”

“…In another study that was conducted on 28 commercial banks from 2009 to 2016 to investigate the relationship between capital structure and profitability revealed that bank's capital structure negatively associated to profitability. (Niluthpaul & Roushanara, 2021) [24] . This study adopted the following hypothesis.…”

Impact of Financial Ratios, Operational Efficiency, and Non-Performing Loans on the Profitability of Nepalese Commercial Banks

“…It indicates that leverage has a positive impact on return on equity. This finding is contradicts to the findings of Sarker and Islam (2021). Similarly, the beta coefficients for liquidity ratio are positive with return on equity.…”

“…Karim et al (2022) revealed that leverage ratios are negatively related to profitability and market return. Similarly, Sarker and Islam (2021) found that bank's capital structure is negatively associated with profitability and vice versa.…”

Impact of Capital Structure on Bank Performance: A Study on Janata Bank Limited of Bangladesh

“…Additionally, it showed that loan to asset ratios had a favorable and significant impact on ROA and ROE. Using panel data from 2009 to 2016, Sarker and Islam (2021) conducted a study, and the results showed a negative correlation between capital structure profitability. The profitability of the banks and their expansion were positively correlated.…”