Capital Structure And Financial Performance Of Commercial Banks Listed In Nairobi Securities Exchange, Kenya

Abstract

This research was carried out to assessing the capital structure and financial performance of commercial banks listed at Nairobi Securities Exchange Kenya (NSE). The variables investigated were; debt, equity, reserves, earnings and share capital. The study objectives were: to determine the influence of debt on financial performance of commercial banks listed in NSE; to examine the influence of equity on financial performance of commercial banks listed in NSE; to assess the influence of share capital on financial performance of commercial banks listed in NSE; to establish the influence of reserves on financial performance of commercial banks listed in NSE; and to find out the influence of earnings on financial performance of commercial banks listed in NSE. The study was supported by three theories that is Modigliani and Miller Model, Pecking Order Theory and Trade-off Theory. Additionally, a descriptive research design was employed as it focuses on describing the state of phenomena or elements as they exist and is structured to address specific research questions. In addition, the research was carried out at Nairobi Security Exchange in Kenya, chosen for being the largest stock exchange across East Africa. The research used a census survey to include all commercial banks quoted at NSE. Moreover, the target population was 10 banks listed in NSE. Also, the sample size was comprised of 10 commercial banks. Consequently, secondary data was used and data was sourced from published audited financial statements of banks, historical data from the NSE, and banking supervisory annual reports from the Central Bank of Kenya, covering a period of 10 years from 2015 to 2024. Analysis of data involved Random Effect Model Analysis (REMA) that expressed the individual institution's intercept as a deviation from a constant mean value. The study’s results showed that debt had a significant negative effect on financial performance, with coefficients of -0.282 for ROA and -0.252 for ROE, both statistically significant at the 1% level. In contrast, equity had a positive, though weaker, relationship with financial performance. The coefficients for equity were 0.765 for ROA and 0.266 for ROE, both significant at the 1% level. Regarding financial reserves, the analysis showed a negative relationship with financial performance, with coefficients of -0.921 for ROA and -0.848 for ROE, both significant at the 1% level. Finally, earnings exhibited a positive impact on financial performance, with coefficients of 0.339 for ROA and 0.292 for ROE, both statistically significant at the 5% level. This suggests that retained earnings, as an internal source of funding, positively support growth and profitability. In conclusion, the study provides valuable insights into the effects of capital structure components on financial performance in the Kenyan banking sector. It emphasizes the importance of managing debt and reserves carefully while fostering growth through earnings and equity. The findings offer policy implications for financial managers and regulators, suggesting a balanced approach to capital structure management to optimize profitability. It is recommended that commercial banks in Kenya consider maintaining a well-balanced capital structure, with an appropriate mix of debt, equity, and retained earnings, to enhance profitability and long-term financial stability.