Effect of Capital Structure on Financial Performance of Selected Commercial Banks in Rwanda: A Case of Bank of Kigali, Equity Bank and I&M Bank

Abstract

The global financial crisis of 2007-2009 highlighted the importance of bank Managerial efficiency and effectiveness. This study seeks to assess the effect of capital structure on financial performance of commercial banks in Rwanda. The aim of the study is to examine the effects of Capital structure on financial performance of listed commercial Banks in Rwanda, a case study of selected commercial banks in Rwanda (BK, I&M bank, Equity). It is important to distinguish the banking sector from the general financial sectors and other sectors. The banking industry being a key pillar in the financial industry and economy as a whole needed to be studied in this context. This study was prompted by the knowledge gap generated by the insufficient studies and inconsistent findings about the effects of capital structure. By shedding light on the impact of capital structure on the financial performance of listed commercial banks in Rwanda, the research study's findings were helpful to the management of BK, I&M Bank, and Equity, investors, shareholders, and academics, as well as the government of Rwanda, the Rwanda Stock Exchange (RSE), and the Capital Market Authority (CMA). Leverage level affects a listed commercial bank's financial performance, according to capital structure theories (including the irrelevance theory of capital structure, the Trade-off theory, the pecking order theory, and the agency cost theory that have been investigated). This study adopted descriptive research design. Therefore the overall annual financial reports of 10 of Commercial Banks formed the target population. The main source of data for the study was Secondary data. The financial and income statements panel data covering seven year period from 2016 to 2022 summarized and ratios calculate and analyse using SPSS version 20 to produce inferential statistics using multiple regression analysis so as to determine the relationships between dependent and independent variables. The multiple regression models used considered performance as the dependent variable and was measured in terms of ROA and ROE. Time series data from 2016 to 2022 extracted from the financial statement of the selected banks, and descriptive statistics, financial analysis techniques and ratios, correlation analysis and regression used to determine how capital structure affect the financial profitability of commercial banks. Different research findings revealed that films with a positive foreign equity share performed better after the global financial crisis, it was argued by literature that, this could be because FDI is the more stable source of financing for firms and is less prone to sudden outflow. Moreover, it could provide firms with access to an internal capital market when external markets are tight or distressed. The focus of this paper is selected Bank’s equity share to the total foreign liabilities, the research findings shows that the selected banks grew by 18.8 percent on account of the growth of deposits and capital. The capital position of the banking sector remained above regulatory requirements. As at end June 2022, the aggregate Capital Adequacy Ratio (CAR) of banks stood at 23.1 percent, higher than the minimum regulatory requirement of 15 percent. Selected Banks continue to hold adequate liquidity buffers both in short- and long-term perspective.as at the end of December 2022 The Liquidity Coverage Ratio (LCR) that measures the ability of banks to fund cash outflows for 30 days stood at 224.7 percent, well above the minimum requirement of 100 percent. During the same period, the Net Stable Funding Ratio (NSFR) that gauges whether banks hold enough stable funding to cover the duration of their long-term assets stood at 130.9 percent, higher than 100 percent minimum regulatory requirement. Despite the improvement in bank loan book indicators, credit risk remains the major risk facing the banking industry. The financial sector is expected to remain sound and stable on the back of sufficient capital and liquidity buffers. However, risks remain due to heightened uncertainties in global and domestic macroeconomic environment.