Factors influencing capital structure choice of commercial banks in Kenya

Abstract

Banks play a significant role in a country’s economy by way of spurring growth. A sound financial system is full of largely banks with sufficient capital to withstand the most apparent adverse shocks. The purpose of the study was to examine the factors influencing capital structure choice of commercial banks in Kenya. The study explored the extent to which effective management of capital structure (debt-equity mix) has on commercial banks’ capabilities to respond to financial crises. The specific objectives of the study included; to examine the effect of collateral value of bank assets on capital structure choice of commercial banks in Kenya; to find out the effect of a bank’s size on capital structure choice of commercial banks in Kenya; to determine the effect of volatility of earnings on capital structure choice of commercial banks in Kenya; to establish the effect of profitability on capital structure choice of commercial banks in Kenya; and to examine the moderating effect of ownership on the relationship between collateral value of banks assets, bank’s size, volatility of earnings, profitability and capital structure choice of commercial banks in Kenya. A descriptive and explanatory survey approach was adopted to obtain information concerning factors affecting capital structure choice of commercial banks in Kenya from heads of finance in 39 banks. The study also used secondary data over the period 2004-2013 from 39 commercial banks’ annual financial reports filed with the Central Bank of Kenya. The data was analysed using Statistical Package for Social Sciences (SPSS) using multiple linear regression models to test the relationship between factors (collateral value of bank assets, bank size, volatility of bank earnings and profitability) and the capital structure choice (debt-equity ratio). The study found that volatility of earnings had the highest and significant effect on the capital structure choice and exhibited a negative and linear correlation with capital structure choice. Profitability followed in order of significance then collateral value of bank assets and bank size. These three factors had positive and linear correlation with capital structure choice. The study further found that there was a significant moderating effect of ownership on the capital structure choice predicting either higher or lower levels of debt-equity ratio depending on the bank manager’s risk aversion, the costs of monitoring and bankruptcy, the threat of takeovers, and the growth opportunities of the bank. The study recommended that future studies could extend these findings by seeking to; establish the effects of interest rate capping on credit access among commercial banks in Kenya, determine the role of financial supermarket model on the bank profitability in Kenya and explore the impact of mergers and acquisitions on the performance of commercial banks in Kenya.