Capital Structure of Commercial Bank in Bangladesh

BUS 485

Sec-04

Business Research

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Prepared by:

Table of Contents

Executive Summary        

1.Introduction        

2.Problem Statement        

3.Purpose        

4.Literature Review        

5.Conceptual Framework of Our Research        

6.Research Questions and Hypothesis:        

7.Research design:        

8.Sampling        

9.Data Collection        

10. Data Analysis        

11.Conclusion        

12.References        

13. Appendix        

Executive Summary

Our research’s main purpose is to find how capital structure of commercial banks in Bangladesh impact their financial performance. Our research is based on the article “Capital Structure of Ghanaian Banks: An Evaluation of Its Impact on Performance” researched by John Gartchie Gatsi. Based on his work we replicated a conceptual framework from previous studies done in the field and observed how the model works. We picked three dependable variables which are ROA, ROE and NIM and made a model to see how short term debt, long term debt and total debt along with firm size and sales affect the dependable variables. After that we generated hypotheses to individually test if there were any relationship between the dependent and independent variables, one by one. We also calculated ratios for five private commercial banks using data from their respective annual reports. The time period for the data was 5 years, from 2011 to 2015. After that EVIEWS software was used to perform regression analysis on the accumulated 5 years’ data of five different private commercial banks of Bangladesh. We interpreted the values generated in R-squared, Adjusted R-squared, Probability(F-Statistic), descriptive table and correlation model by the analytical software and used them to draw our conclusion. Even though there were limitation it was concluded that most of the null hypothesis was accepted and the model was not a good fit.

1.Introduction

This study focuses on capital structure & performance of listed commercial banks in the banking sector. Capital structure is one of the major topics among scholars in finance. Capital Structure in finance term means the way a firm finances his assets across the blend of debt, equity or hybrid securities (Saad, 2010). The concept is generally described as the combination of debt & equity that make the total capital of firms. Capital structure decision is the vital one since the profitability of an enterprise is directly affected by such decision. The term "capital structure" of an enterprise is actually a combination of equity shares, preference shares and long term debts. The relationship between capital structure and profitability is one that received considerable attention in the finance literature. Modigliani and Miller (1958 and 1963) made the first publication on capital structure to generate intense debate on the subject matter. Many studies on capital structure followed thereafter. Van Horne and Wachowicz (2008) identified debts, preferred stock and common stock as components of capital structure discourse. In reality, however, firms use only debt and common stock as the basis of their capital structure. Since the time of Modigliani and Miller (1963), the relationship between leverage and profitability has crystallized. Thus, for banks which are naturally highly geared firms, a study of capital structure and profitability is very important. Ravid and Sarig (1991), explained that Return on Assets (ROA) and Return on Equity (ROE) are key profitability metrics of firms.

Nonetheless, in the context of the banking industry, the subject has received a limited research attention. The study regarding the effects of capital structure on profitability will help us to know the potential problems in performance and capital structure. The purpose of conducting this study is to measure the impact of capital structure on firms‟ performance to provide empirical evidence regarding Bangladeshi banking over a selected period of years.

A number of researches have been carried out on this subject with the objective of determining the impact of capital structure on corporate performance (Krawish and Khraiwesh 2010). These studies were conducted in the past on the determinants of capital structure in both developing and developed country perspectives; For example, Bevan and Danbolt (2000, 2002), among many others, used data from developed economies. But for developing economies, only a few studies have been carried out on the subject; for example, Pandey (2001) used data from India, Iwarere and Akinleye (2010) used data from Nigeria. In both developed and developing economies, the researches on the topic have used different variables believed to be empirical determinants of the capital structure. Though numerous empirical researches (Ebaid, 2009; Heng, 2011; Stiglitz, 1972; Groth & Anderson, 1997; Roden and Lewellen, 1995; Amidu, 2007) have been conducted to determine the relationship between capital structure and firm’s performance, Bangladesh has very little contribution to this literature. Therefore, this study analyzes the impact of capital structure on the most leading industry of Bangladesh, the banking sector. This study will help to understand the general practices of capital structure in banking industry and also the sensitivity of leverage on the performance of this industry.