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

Isah Serwadda

Doctoral thesis

Abstract:

The choice of the capital structure remains one of the vital financial decisions of banks in the present day modern economies across the globe. As financing decisions impact on performance and thus banks' value, this thesis analyses the effects of capital structure on commercial banks' performance in Uganda. To achieve the objectives of this thesis, a quantitative panel data methodology was adopted. This thesis applied an analytical approach as it used a micro panel data set of twenty commercial banks out of twenty-five banks for 2006 to 2015 which generated a total of 200 year-bank observations. Banks selected exclude central bank or bank of Uganda,the country‟s licensing, supervisory and regulatory bank of all other banks in Uganda. The Ugandan banking sector has twenty-five banks consisting of both local and foreign banks (Bank of Uganda, 2016).The thesis aimed to analyse the effects of capital structure on banks' performance in Uganda. The thesis employed annual micro panel data from the Bank scope database, the central bank of Uganda, the African development bank plus published annual income financial statements together with balance sheets from the banks' websites. This was pursued in order to estimate the ratios plus coefficients needed for investigation during the study process.The thesis employed four performance indicators of returns on assets, returns on equity, net interest margin and cost to income ratio to determine bank performance. Panel regression models were employed to determine the effects of capital structure on bank performance with use of STATA software.Independent variables were sub-divided into the structure of capital variables such as; long-term debt to total assets, short-term debt to total assets and total debt ratio and then control variables were bank size and tangibility of assets. Results portray a positive relationship between capital structure variables and bank performance. It's between long-term debts, total debt with net interest margins. There is as well 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 asset. Findings also signify a positive relationship between bank size and net interest margin. It is still the same between bank size andvireturns on equity plus return on assets. There is a negative relationship between the tangibility of asset and net interest margin. It„s the same with return on equity. The findings propose that profitable banks rely more on debts financing as their funding alternative. This is advanced by the fact that approximately 68% of total assets are reflected by short-term debt for Uganda's commercial banks. This further implies that Ugandan banks greatly rely on short-term debt funding for their business compared to long-term debt.Hence, this thesis 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. They should also advocate for equity financing so as to minimise financing costs further as a way of optimizing profitability and thus value for the banks. The banks should also conduct deposit mobilisation drives, enhance loan advances in their financing decisions; this will enable banks to remain at the top of the profitability game competitively in the banking industry.

Abstract:

The choice of the capital structure remains one of the vital financial decisions of banks in the present day modern economies across the globe. As financing decisions impact on performance and thus banks' value, this thesis analyses the effects of capital structure on commercial banks' performance in Uganda. To achieve the objectives of this thesis, a quantitative panel data methodology was adopted. This thesis applied an analytical approach as it used a micro panel data set of twenty commercial banks out of twenty-five banks for 2006 to 2015 which generated a total of 200 year-bank observations. Banks selected exclude central bank or bank of Uganda,the country‟s licensing, supervisory and regulatory bank of all other banks in Uganda. The Ugandan banking sector has twenty-five banks consisting of both local and foreign banks (Bank of Uganda, 2016).The thesis aimed to analyse the effects of capital structure on banks' performance in Uganda. The thesis employed annual micro panel data from the Bank scope database, the central bank of Uganda, the African development bank plus published annual income financial statements together with balance sheets from the banks' websites. This was pursued in order to estimate the ratios plus coefficients needed for investigation during the study process.The thesis employed four performance indicators of returns on assets, returns on equity, net interest margin and cost to income ratio to determine bank performance. Panel regression models were employed to determine the effects of capital structure on bank performance with use of STATA software.Independent variables were sub-divided into the structure of capital variables such as; long-term debt to total assets, short-term debt to total assets and total debt ratio and then control variables were bank size and tangibility of assets. Results portray a positive relationship between capital structure variables and bank performance. It's between long-term debts, total debt with net interest margins. There is as well 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 asset. Findings also signify a positive relationship between bank size and net interest margin. It is still the same between bank size andvireturns on equity plus return on assets. There is a negative relationship between the tangibility of asset and net interest margin. It„s the same with return on equity. The findings propose that profitable banks rely more on debts financing as their funding alternative. This is advanced by the fact that approximately 68% of total assets are reflected by short-term debt for Uganda's commercial banks. This further implies that Ugandan banks greatly rely on short-term debt funding for their business compared to long-term debt.Hence, this thesis 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. They should also advocate for equity financing so as to minimise financing costs further as a way of optimizing profitability and thus value for the banks. The banks should also conduct deposit mobilisation drives, enhance loan advances in their financing decisions; this will enable banks to remain at the top of the profitability game competitively in the banking industry.

Keywords

capital structure, returns on assets, bank´s performance

Keywords

bank´s performance, capital structure, returns on assets

Language used: English

Date on which the thesis was submitted / produced: 24. 6. 2019

Thesis defence

• Supervisor: doc. Ing. Zuzana Kučerová, Ph.D.

Mendel University in Brno

Faculty of Business and Economics

Doctoral programme / field:
Economics and Management / Business Management and Economics