CAPITAL STRUCTURE IMPACT ON THE PERFORMANCE OF BANKING INDUSTRY IN NIGERIA

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CAPITAL STRUCTURE IMPACT ON THE PERFORMANCE OF BANKING INDUSTRY IN NIGERIA

ABSTRACT

This study examines the impact of capital structure on the performance of the banking industry in Nigeria. The objective of the study was to examine the effect of total debt on the bank profitability and also to determine the impact of equity on the profitability of the bank. The focus of this study is on five (5) selected bank comprising of first bank, sterling bank, United bank for Africa, Access bank and guaranty trust bank (GTB), Secondary data were source of data collection for this study, and the data were gotten from the annual reports of the selected banks from 2009 to 2013. The quantitative survey research design was the research design adopted for this study. The regression analytical technique was used to analyze and test the stated hypothesis. The findings revealed that there is no significant relationship between total debt of the and the return on asset of the bank, and also, the equity was observed to have no significant relationship with the return on equity of the banks. It was concluded that short-term debt and long-term debt does not have a significant impact on the return on asset of the banks. Also, the study concludes that the equity of the banks does not have a positive relationship with the performance of the banking industry (ROE). It was recommended that banks should have high leverage as compared to other non-financial institution to enable them save more clients’ needs.

1.1 CHAPTER ONE

1.2 STATEMENT OF THE PROBLEM

Every investment decision taken by the manager affects the performance of the banks. What percentage of the capital should be debt and what percentage should be equity so as to maximize profitability of the bank given that each source of finance has a cost-benefit attach to it, is a major managerial decision. The difficulties associated with designing an optimum capital structure policies to enhance profitability is the reason why this study sought to examine whether capital structure affect banks’ performance concentrating on five (5) selected banks, First Bank, Sterling Bank, Guarantee Trust Bank, United Bank for Africa and Access Bank. The study, therefore, attempts to address the capital structure puzzle using data from the Nigerian quoted banks.

1.3 OBJECTIVES OF THE STUDY

The main objective of this study is to examine the relationship between capital structure and financial performance of Nigerian banks. Accordingly this study clusters around two specific objectives:

To examine the effect of total debt ratio on the profitability of Nigerian banks.

To examine the effect of equity on the profitability of Nigerian banks.

1.4 RESEARCH QUESTION

For this research work, the following questions would serve as a guide identifying the effect of capital structure on banks performance:

1. To what extent is the profitability of Nigeria banks influenced by total debt?

2 To what extent is the profitability of Nigerian banks influenced by equity.

1.5 RESEARCH HYPOTHESES

The hypotheses to be tested in order to provide answers to the questions stated in 1.4 above are stated in null form as follows:

Ho: The Profitability of Nigerian banks is not significantly influenced by total debt ratio.

Hi: The Profitability of Nigerian banks is significantly influenced by total debt ratio.

Ho: The Profitability of Nigerian banks is not significantly influenced by equity.

Hi: The Profitability of Nigerian banks is significantly influenced by equity.

1.6 SCOPE OF THE STUDY.

This study focuses on the effect of capital structure on banks, performance. The study covers a period of five (5) years spanning from 2009 to 2013.

This study is also restricted to banks listed on the Nigerian stock exchange (NSE) as at the end of December 2014 for availability of data and to enhance meaningful comparison.

1.7 SIGNIFICANCE OF THE STUDY

This study is significant in many respects. Firstly, it seeks to add to the existing literature on the effect of capital structure on banks’ performance in the context of an emerging global market.

Secondly, the study will be useful to managers who will use the findings of this research investigation as a guide in financial decision making.

The study is expected to provide evidence that would serve as important quantitative information into the caldron of policies from an emerging economy.

1.8. LIMITATIONS OF THE STUDY

Olannye (2006) maintains that limitations are those constraints facing the researchers which by nature of the research situation itself may limit the researchers in making generalization. Specifically, limitations are those factors inherent in the research situation that might affect the result which the investigation must acknowledge and recognize.

Every research investigation focuses one limitation or the other. Accordingly, this research project is not immune to that. Some of these limitations are financial, materials, physical and otherwise. The study envisaged is carried on, but not without the following limitations.

Financial Constraints: The financial involvement of a research scope of this nature is large especially in situations where students have lean financial base. The indigent researcher is limited to the extent his financial resources could carry him.

Time Constraints: This research work is carried out at the time the researcher is an undergraduate student in the university. The time limit coupled with the fact that the researcher must also attend classes and learn is a major constraint to this investigation. However, the credibility of this investigation is not jeopardized.

Location of the study: This study is carried out using quoted companies in the Nigerian Stock Exchange. Nigeria is a developing nation. Most times, interest rate fluctuates. Therefore, the generalization may have limited application to developed nations.

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