| dc.description.abstract | The impact of capital structure on the value of the firm has been a puzzling issue in corporate
finance since the capital structure “irrelevance” proposition introduced in 1958 by Modigliani
and Miller. To date, determining the mix in the firm’s capital that will improve a firm’s value is a
contentious topic in financial literature. This study evaluated the effect of capital structure on
financial performance of commercial banks in Kenya by determining the effect of short term
debt asset ratio, long term debt asset ratio, inter bank borrowings and equity on financial
performance. In evaluating the relationship between the variables, a descriptive research design
was applied. The target population was all the 43 commercial banks in Kenya. A panel data
model was used to analyze all data from 34 commercial banks that had been in operation over a
study period of 10 years (2005 – 2014). The study period was appropriate as it covered various
cycles in the Kenyan banking sector. The results of the study will be useful to all those interested
in bank policy making. The study established that inter bank borrowing and equity have
significant positive effect on profitability. However short term debt and long term debt asset ratio
do not have a significant effect on profitability. The following recommendations are made. First,
since long term or short term debt to asset ratios do not significantly affect profitability of
commercial banks, the study recommends to bank managers to focus on finding a satisfactory
debt level that satisfies regulations and focus on other variables that, may be critical in
influencing profitability. Secondly, the study recommends bank managers to focus on improving
the capital strengths of their banks by either rights issue, bonus issue of shares or through high
retention of profits. Lastly, Bank managers should devise effective relationships with other banks
so as to be able to access lending from them when needs arise. | en_US |
