IMPACT OF CAPITAL STRUCTURE ON PROFITABILITY OF COMMERCIAL BANKS IN TANZANIA
DOI:
https://doi.org/10.35774/jee2024.04.599Keywords:
capital structure, commercial banks, profitabilityAbstract
This paper aims to examine how the capital structure, specifically debt and equity, affects the profitability of commercial banks in Tanzania, using panel data from 2017 to 2021. A panel data research design was employed, utilizing secondary data extracted from audited financial statements of commercial banks. Return on assets (ROA) served as the dependent variable, while the independent variables included debt capital, equity capital, and the debt-to-equity ratio. Results indicated that the variables were initially not normally distributed, necessitating normalization. Correlation analysis revealed no multicollinearity problems among the variables. Based on the Hausman test, the fixed effects model was identified as the appropriate model. The analysis showed that a 1% increase in debt capital increases the profitability of a commercial bank by 16.79%. The positive coefficient for debt implies opportunities for commercial banks to enhance profitability through debt financing. In contrast, a 1% increase in the debt-to-equity ratio is associated with an 18.07% decline in profitability (ROA), indicating a negative relationship. Similarly, an increase in equity capital is linked to a decline in profitabil ity, holding other factors constant. The study advocates for a comprehensive assessment and consideration of situational factors when making capital structure decisions. The inverse relationship between the debt-to-equity ratio and profitability also suggests that excessive debt may pose financial risk, making the bank less attractive to potential investors.
JEL: G21, G32, O55.
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Received: September 17, 2024.
Reviewed: September 29, 2024.
Accepted: October 16, 2024.
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