The Relationship Between Leverage and Financial Performance of Commercial Banks Listed at the Nairobi Securities Exchange

Abstract

Leverage is the ratio between a company’s debt and equity. Despite wide researches done, there is no agreeable conclusion on whether leverage positively or negatively affects performance. The objective of the study was to investigate and explain the relationship between leverage and financial performance of commercial banks listed at the Nairobi Securities Exchange. Descriptive research design methodology was used covering a 10-year period, 2007 – 2016. Secondary data on the 11 listed commercial banks at the NSE was collected and analyzed using a multiple regression, correlation analysis and descriptive statistics. The independent variables were degree of financial leverage (DFL), non-performing loans ratio (NPLR) and bank size while the dependent variable was return on assets (ROA). Regression results showed that ROA was negatively related to leverage but positively related to bank size and credit risk management. In conclusion, leverage as measured by DFL has a significant negative relationship with financial performance as measured by ROA. Thus, the study recommends that commercial banks should maintain leverage levels at a minimum and increase size so as to maximize performance.