An investigation of the determinants of capital structure of commercial banks in Kenya

Abstract

The capital structures of commercial banks have a huge role to play towards the stability of the banks. The objective of the capital structure is to maximize the shareholders wealth by either maximizing the expected return or minimizing the cost of capital. The total value of the firm will be maximized if good decision of the capital structure is made.

The capital structure decision cannot be made in a vacuum. It has to form part of a sensible financial plan that takes into account future investment opportunities and the banks dividend policy. There is need to take into account the effect of an issue of debt or equity on future income of the banks. In order to be able to evaluate the effectiveness of the banks capital structure there is need to establish the determinants of the banks capital structure.

The studies main objectives was first to identify the relationship between capital structure and hypothesized variables such as profitability, business risk, growth rate, size and tax on the firm. Secondly the study seeks to know what the commercial banks use in determining variables when setting up the capital structures.

This study makes an important contribution in the areas of banks capital structure. The corporate managers can use it to identify the determinant of capital structure that can assist them in their capital structure decision. The study is also be of much use to the government and other policy makers to come up with policies concerning the capital structures. Data was collected by the use of questionnaire and analyzed with the help of statistical package for social sciences (SPSS).