Effect of Capital Structure on Financial Performance of Commercial Banks in Kenya -A Case Study of Family Bank Kenya Ltd

Abstract

The study was to establish the effect of capital structure on the financial performance of Family Bank Kenya Ltd for the 11 years period from the year 2010 to 2020. The study used Returns on Total Assets (ROA) and Returns on Shareholders’ Equity (ROE) as financial performance variables while Short-term Outstanding Debts to Total Assets (SOD/TA), Long-term Outstanding Debts to Total Assets (LOD/TA) and Total Debts to Total Assets (TOD/TA) as the capital structure variables. Secondary data was collected from the audited financial statements of the bank which were available from the website. The data was analysed using SPSS version 22 and Microsoft Excel to determine the suitability of the data for regression analysis and other parametric tests. The data was found to have met all the requirements for regression analysis. The study found that capital structure positively and significantly impacted financial performance of Family Bank Kenya Ltd. The regression analysis on the effect of capital structure on ROA and ROE indicated that collectively all the independent variables had a R2 of 75% and 77% respectively. Collectively the capital structure variables positively and significantly affected the ROA and ROE as per the ANOVA table with a p-value of 0.017 and 0.013 respectively. The t-statistic revealed that only one independent variable TOD/TA positively and significantly contributed a unique variance at a p-value of 0.022 for ROA and p-value of 0.024 for ROE. The other independent variables SOD/TA and LOD/TA negatively and insignificantly affected financial performance as represented by ROA and ROE.