Capital Structure and Firm Performance: Evidences from Commercial Banks in Tanzania

Abstract

The aim of the study was to assess the impact of capital structure on bank performance in Tanzania. The study used panel data for the period of 5 years and 38 banks operating in the country. The study used fixed effect regression model to estimate the relationship between the firm leverage and firm performance.

The findings of the study show that banks in Tanzania use more debts as their source of finance than equity financing. Comparatively, the banks were found to use more short term debts which are mainly composed of deposits mobilized from customers than long term commercial debts. From the study results, it was deduced that, the impact of capital structure on firm performance depends on the variables and indicators that are used to approximate capital structure and performance. The study results indicated presence of negative trade-off between the use of debts and firm performance when capital structure was measured using the ratio of debts to equity and performance was measured by cost efficiency and return on equity. Contradicting results were observed when capital structure was measured as the ratio of debt to asset and when performance was measured as the ratio of debt to asset.

The study concludes that, banks in Tanzania prefer to use more short term debts in form of deposits other than commercial debts hence they still have a chance to excel as the debts to asset ratio was found to have significant positive impact on return on equity. Using commercial debts the banks can extend the operations to rural areas hence save unbanked population. The findings of this study were consistent with most of previous results but did not provide a single stand on whether the leverage has impact on the firm performance. The firm leverage depends on the estimation variables hence should be critically assessed before making generalization.

Keywords: Capital structure, Performance, Commercial Banks, Tanzania