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Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks

Risks (Basel), 2024-04, Vol.12 (4), p.69 [Peer Reviewed Journal]

COPYRIGHT 2024 MDPI AG ;2024 by the authors. Licensee MDPI, Basel, Switzerland. This article is an open access article distributed under the terms and conditions of the Creative Commons Attribution (CC BY) license (https://creativecommons.org/licenses/by/4.0/). Notwithstanding the ProQuest Terms and Conditions, you may use this content in accordance with the terms of the License. ;ISSN: 2227-9091 ;EISSN: 2227-9091 ;DOI: 10.3390/risks12040069

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  • Title:
    Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks
  • Author: Muhammed, Seid ; Desalegn, Goshu ; Emese, Prihoda
  • Subjects: Bad debts ; Bank capital ; Banking industry ; Banks ; Capital structure ; Commercial banks ; Corporate profits ; Debt financing ; Decision making ; Equity ; financial performance ; Interest income ; International finance ; Private banking ; Profitability ; Ratios ; Stockholders
  • Is Part Of: Risks (Basel), 2024-04, Vol.12 (4), p.69
  • Description: 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.
  • Publisher: Basel: MDPI AG
  • Language: English
  • Identifier: ISSN: 2227-9091
    EISSN: 2227-9091
    DOI: 10.3390/risks12040069
  • Source: ROAD: Directory of Open Access Scholarly Resources
    ProQuest Central
    DOAJ Directory of Open Access Journals
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