Effect of Statutory Capital Structure on Financial Distress Among Commercial Banks in Kenya.

Abstract

The study examined the effects of Capital structure on financial distress among commercial Banks in Kenya. Most studies on capital structure conducted across the globe found inconsistencies on the effects of capital structure on the financial distress of firms. In Kenya studies done on capital structure and financial distress concentrated on the effect of capital structure on financial performance for microfinance institutions, industrial firms and allied sectors although the banking sector is different from any other sector of the market in terms of high leverage and regulation. This study adopted three theories namely the Agency theory, Wrecker,s theory of financial distress and Buffer theory of capital adequacy. The study was conducted on 44 commercial banks in Kenya which were in operation in Kenya for the five years of study from 2013 to 2017. The various ratios of these commercial banks were computed from the various data collected from the data extracted from their financial statement for the period. The data was then analyzed using linear regression models using SPSS19 to establish if there is any significant relationship of capital structure and the financial performance of these commercial banks. The finding of the analysis concluded that there is a significant relationship between the capital structure and the financial distress of commercial banks in Kenya. Therefore it was concluded that capital structure affects financial distress of commercial banks in Kenya. The findings of this research study will help the Management of Kenyan Commercial Banks, investors, shareholders, scholars, Government of Kenya by providing insight on effect of capital structure on financial distress.