Effect of Capital Structure on Financial Performance of Commercial Banks in Tanzania.

Evaristi, Janeth Z. (2021) Effect of Capital Structure on Financial Performance of Commercial Banks in Tanzania. Masters thesis, The Open University of Tanzania.

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Abstract

Capital structure is as important as ever to maximize returns and strengthen financial performance of banks. This research aimed at assessing the effect of capital structure on financial performance of commercial banks in Tanzania. Specifically, the study determined: the effect of TDTA on ROA, the effect of TDTA on ROE, the effect of ETA on ROA and the effect of ETA on ROE. SZ and AG were controlled variables. The study employed explanatory research design and adopted purposive sampling technique. Secondary panel data were collected from audited financial statements of 34 commercial banks from a population of 39 banks over a period of 2013 - 2019. Documentary analysis and website survey were the data collection instruments. Data were analyzed using descriptive statistics; correlations and multiple regression models with the aid of STATA programme. The study found out that ETA, TDTA and SZ had an insignificant positive relationship with ROE, AG had a significant positive relationship with ROE, TDTA had a significant positive relationship with ROA, ETA had an insignificant positive relationship with ROA, SZ and AG had an insignificant negative relationship with ROA. The study concluded that capital structure had both positive and negative effects on the banks’ financial performance. The study recommended that the policy maker (BOT) should consider raising the minimum equity capital requirement for the banks’ and establish a policy that directs the banks’ on managing their SZ and AG to enable the banks become responsive to ongoing capital needs while minimizing the cost of funding. The study contributed knowledge on the effects of TDTA, ETA, SZ and AG on ROE and ROA of commercial banks in Tanzania which is beneficial for policy makers, banks’ management, researchers, investors and other stakeholders interested to learn about the effect of capital structure on financial performance of the banks’. Keywords: Capital structure, financial performance, commercial banks in Tanzania.

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