The rationale of this study was to provide insights into the relationship between capital
structure and financial performance of Kenya’s banking industry. The pioneer work on
capital structure by Modigliani and Miller (1958) despite of the unrealistic assumptions
has been source of inspirations for scholars. Their propositions state that the market
value of any firm and its cost of capital are independent of its capital structure in
presence of perfect market conditions. The general objective of this study was to assess
the effect of capital structure on financial performance of commercial banks in Kenya.
The Specific Objectives was to assess the effect of debt on financial performance of
commercial banks in Kenya, to assess the effect of internal equity on financial
performance of commercial banks in Kenya, to assess the effect of external equity on
financial performance of commercial banks in Kenya and to assess the effect of
preference share on financial performance of commercial banks in Kenya. The financial
performance was measured using EBIT (earnings before interest and tax). The target
population was the banking industry. A census was conducted. Secondary data was
used. Data was drawn from a sample of the registered banks by the Central Bank of
Kenya in Kenya. According to the central bank of Kenya, there were 43 licensed
commercial banks in Kenya. The study also used annual reports that were available
from their websites and in the Central bank of Kenya website. Data was obtained for a
ten year period from 2005 to 2014. Data analysis was done using SPSS software version
21 for efficient data representation. The model equation shows that growth in debt
would affect financial performance positively leading to improvement in profitability.
If there is an increase in debt levels, the EBIT is expected to increase by 17.6% per unit
measure. The study also shows similar effect on retained earnings and preference shares
on commercial banks’ financial performance. If there is a unit increase in retained
earnings and preference shares, the EBIT will tend to increase by 21.8% and 0.8%
respectively, indicating that debt and retained earnings are more significant in
predicting financial performance than preference shares which have insignificant factor
at 95% confidence level. On the other hand, ordinary shares show different effect, that
a unit increase would affect financial performance negatively by decreasing
performance at a rate of -1%.
SAMUEL, D (2021). Effects Of Capital Structure On Financial Performance Of Commercial Banks In Kenya. Afribary. Retrieved from https://afribary.com/works/effects-of-capital-structure-on-financial-performance-of-commercial-banks-in-kenya
SAMUEL, DORIS "Effects Of Capital Structure On Financial Performance Of Commercial Banks In Kenya" Afribary. Afribary, 08 May. 2021, https://afribary.com/works/effects-of-capital-structure-on-financial-performance-of-commercial-banks-in-kenya. Accessed 04 Mar. 2024.
SAMUEL, DORIS . "Effects Of Capital Structure On Financial Performance Of Commercial Banks In Kenya". Afribary, Afribary, 08 May. 2021. Web. 04 Mar. 2024. < https://afribary.com/works/effects-of-capital-structure-on-financial-performance-of-commercial-banks-in-kenya >.
SAMUEL, DORIS . "Effects Of Capital Structure On Financial Performance Of Commercial Banks In Kenya" Afribary (2021). Accessed March 04, 2024. https://afribary.com/works/effects-of-capital-structure-on-financial-performance-of-commercial-banks-in-kenya