Effect of Capital Structure on Financial Performance of Banking Institutions Listed in Nairobi Securities Exchange

Capital structure is a financial tool that helps to determine how firms choose their capital structure, a firms capital structure is then the composition or structure of its liabilities. The general objective of this study is to determine the effect of capital structure to the companys financial performance of the listed banking institutions in Nairobi Securities Exchange. The specific objectives of the study was to, establish how debt, leverage risk, interest rate, and debt equity combinations affect performance of banking institutions listed in the NSE. The study made use of descriptive research study design and data was collected using questionnaires which were administered to the management of the selected banks under study. Correlation and multiple regression analysis were used for analysis. The results of the study were analysed to see whether there is any effect of capital structure on financial performance. The study also determined whether capital structure have effect on financial performance of the firm by considering the debt, leverage risk, debt equity ratio and interest rates and how they are related to Return on Equity (ROE), Return on Assets (ROA), Gross Profit Margin and Net Profit Margin (NPM) at determined significant level. The study targeted 35 respondents but managed to obtain responses from 30 of them thus representing 86 % response rate. The findings indicated that debt had a coefficient of 0.747, leverage risk had a coefficient of 0.751, interest rate had a coefficient of 0.781, and debt-equity proportion had a coefficient of 0.791. also the study revealed that majority of the respondents agreed that the central bank lending rate affected the decision to finance their firms working capital to a great extent (3.8676), majority of the respondents agreed that the ratio of non-performing assets is high in a majority of the banks under study (3.8971) and that capital was always maintained at levels above regulatory levels in many banks (3.8971). in addition, the study findings revealed that majority of the respondents agreed that the bank found it cheaper using more of equity financing to a great extent (4.4647) and that the leverage risk affected the performance of many banks and that the trend of earnings was properly monitored by the bank to a great extent (3.6765). The research findings indicated that there was a positive relationship (R= 0.608) between the variables. The study also revealed that 56.4 % of financial performance of commercial banks listed at the NSE could be explained by capital structure aspects under study. The study findings revealed that the combined effect of the four aspects under study on financial performance of commercial banks listed at the NSE was statistically significant. This was revealed by the ANOVA findings where high F values and log p values were registered at 95 % confidence interval. The study recommends that, The Central Bank of Kenya to formulate and enact a policy which makes commercial debt cheaper hence reduce cost of operations of banks, Management of commercial banks listed at the NSE to reduce interest rates so as to attract investors who will inject more funds into these banks. These funds can be used for onward lending hence increased interest income and management of commercial banks listed at the NSE to contain insolvency to enhance credibility among their customers. The study recommended that a broad based study covering both public and private institutions be done to find out the effect of the factors under study on their financial performance. It is also suggested that future research should focus on the capital structure factors on organizational performance.