The Impact Of Capital Structure On Profitability Of Commercial Banks In Ethiopia

The choice of capital structure is one of the most important strategic financial decisions of firms.rnSince financing decisions influence profitability and hence firm’s value, this study examines thernimpact of capital structure on profitability of core business operations of commercial banks inrnEthiopia. In order to meet the objectives of this study a quantitative panel data methodology wasrnemployed. The panel data were obtained from the audited financial statements of eightrncommercial banks and National Bank of Ethiopia for the period of twelve years (2001/02 –rn2012/13). The panel data fixed effect estimation model was applied for the data analysis throughrnEViews 8.1 statistical package. It was observed that 89% of the total capital of commercial banksrnin Ethiopia in the period under study was made up of debt. Of this, 75% constitute deposit andrnthe remaining was non-deposit liabilities. This has reaffirmed the fact that banks are highlyrnlevered institutions. The findings revealed that capital structure as measured by total debt to assetrnhad statistically significant negative impact, whereas deposit to asset had statistically significantrnpositive impact on profitability of core business operations of commercial banks. Moreover, loanrnto deposit, spread and asset size also had statistically significant and positive relationship withrnprofitability. However, growth found to have statistically insignificant impact on profitability.rnTherefore, banks should give due consideration to manage their debts properly, mobilize depositrnsufficiently, increase loan advances, spread, and size in their financing decisions. Furthermore,rnbanks also advised to reduce non-deposit debt financing and raise equity financing so that tornkeep costs of financing at minimum level and hence optimize profitability and the value ofrnbanks. Besides, the policy maker, National Bank of Ethiopia also recommended reconsidering tornraise the minimum capital requirement for banks. Finally, future researchers also recommendedrnassessing the overall performance of banks and other business sectors in the area of this researchrnKey words: Banks, Capital structure, Profitability, core business operation, and panel data.

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