The effects of capital structure on banks' performance, the Ugandan perspective

Abstract

The paper aims to investigate the effects of capital structure on banks' performance on Ugandan banks for a ten years period, 2006-2015 with a sample of 20 commercial banks. The study employs four performance indicators of return on equity, return on assets, net interest margin and cost to income ratio to determine bank performance. Panel regression models are used to determine the effects of capital structure on bank performance. Independent variables are sub-divided into capital structure variables namely; long-term debt to total assets, short-term debt to total assets and total debt ratio and then control variables are bank size and tangibility of assets. Results portray that there is a positive relationship between capital structure variables and bank performance. It's between long-term debts, total debt with net interest margin. There is also a positive relationship between total debt and return on assets. It is still the same between total debt and returns on equity. However, there is a negative relationship between short-term debt and return on assets. The results also signify a positive relationship between bank size and net interest margin. It is still the same between bank size and returns on equity plus return on assets. There is a negative relationship between the tangibility of assets and net interest margin. It is also the same with return on equity. The findings propose that profitable banks rely more on debt financing as their financing option. This is advanced by the fact that approximately 68 % of total assets are represented by short-term debts for Uganda's commercial banks. This further implies that Ugandan banks largely depend on short-term debt financing for their business operations compared to long-term debt. Hence the study recommends that executive banking management teams plus policymakers should design prudent financing decisions aimed at reducing overreliance on debts to yield optimal capital structure levels. This will enable banks to remain at the top of the profitability game competitively in the banking industry.