IUP Journal of Bank Management | Journals

The IUP Journal of Bank Management

The Impact of Capital Structure on the Profitability of Nepalese Commercial Banks

Article Details

Pub. Date	: Oct, 2021
Product Name	: The IUP Journal of Bank Management
Product Type	: Article
Product Code	: IJBM11121
Author Name	: Radhe Shyam Pradhan* and Krishna Maya Kafle
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 17

Price

Download

Abstract

This study examines the impact of capital structure on the profitability of Nepalese commercial banks. Return on assets, return on equity and net interest margin are selected as the dependent variables. The selected independent variables are capital adequacy ratio, bank size, total debt to total assets ratio, total debt to total equity ratio and short- term debt to total assets ratio. The study is based on the secondary data of 28 commercial banks with 224 observations for the period 2011-12 to 2018-19. The data is collected from the Banking and Financial Statistics published by Nepal Rastra Bank and annual reports of the selected commercial banks. The regression models are estimated to test the impact of capital structure on the profitability of Nepalese commercial banks. The study showed that short-term debt to total assets ratio has a negative impact on return on equity, return on assets and net interest margin. It indicates that increase in short- term debt to total assets ratio leads to a decrease in return on equity, return on assets and net interest margin. Similarly, total debt to total assets ratio has a negative impact on return on assets. It indicates that increase in total debt to total assets ratio leads to a decrease in return on assets. Likewise, total debt to total equity ratio has a negative impact on return on equity, return on assets and net interest margin. It means that increase in total debt to total equity ratio leads to a decrease in return on equity, return on assets and net interest margin. Further, there is a negative impact of capital adequacy ratio on return on equity. This means that increase in capital adequacy ratio leads to decrease in return on equity. However, bank size has a positive impact on return on equity, return on assets and net interest margin. It indicates that the larger the bank size, the higher would be the return on equity, return on assets and net interest margin.

Introduction

Capital structure decision is one of the most important decisions faced by firm management. In pursuit of maximizing firm value, financial managers are charged with two main responsibilities: investment decisions and capital structure choices (Harrison and Widjaja, 2014). The capital structure of a company is particularly important because it can influence the ability of the firm to take up investment opportunities. The decision on capital structure is crucial for both managers and regulators as well as for the shareholders (Al-Kayed et al., 2014). Diamond and Raghuram (2000) stated that the capital structure affects the stability of the bank. It is imperative to understand the factors which drive the capital structure decision of banks. According to Lim et al. (2012), capital structure is the way a firm generates the money to finance its operations.