The Relationship Between Firm Size and Financial Leverage of Commercial Banks in Kenya

Abstract

A firm makes a decision to finance its investment by either use of debt or equity. It is essential to demystify that interest rate on debt is perpetual irrespective of the firm’s return rate on assets. Financial leverage utilized by the firm seeks to generate adequate funds with fixed charges compared to their costs. An increase in debt results into an increase in financial leverage. This study was set out to determine the link between firm size and financial leverage of commercial banks in Kenya. To accomplish this important goal, the study implemented a descriptive design to detect the link between the variables. Target population involved a survey of all the Kenyan commercial banks. Secondary data was derived from CBK annual reports for a duration spanning for five years (2012-2016), analysis was achieved using descriptive statistics and inferential statistics. The study found no correlation between size of the bank, profitability, liquidity, equity structure with financial leverage. However, a strong correlation existed between long-term debt and financial leverage. Coefficient of determination was 9%; analysis of variance was significant (below 5% 0.002). Long-term debt and equity structure were significant while bank size, liquidity and profitability were not significant. This research recommended that commercial banks should use their long-term debt efficiently to boost the bank’s profitability and overall performance. Commercial banks ought to retain adequate levels of liquidity to service loans and meet the bank obligations. It is also recommended that commercial banks should invest in advanced technology to boost banking efficiency and mitigate costs. Due to time and resources constraint, the researcher was forced to limit herself to Kenyan commercial banks hence the findings obtained under this study cannot be applied to generalize the entire banking sector in Kenya. Published sources of data were quite historical and thus did not clearly reflect the needs of the researcher; this might have impacted negatively on the quality of the findings. A replica of this research need to be done using a different methodology ( research design, duration, target population) in order to establish the long-term effect of bank size and financial leverage of commercial banks.