The Impact of Capital Structure on the Financial Performance of Commercial Banks in Kosovo

This paper aims to investigate the impact of capital structure on the financial performance of commercial banks in Kosovo over the period 2014-2023. The empirical data are obtained from the quarterly financial statements published by commercial banks. The data from eight banks are organised in the form of panel data and models such as FE, RE and GMM are used. Hence, the paper investigates whether the capital structure measure through total liabilities to total assets, total liabilities to total capital and long-term liabilities to total assets affects the profitability of banks measured by Return on Assets (ROA) and Return on Equity (ROE). Bank size and asset growth are used as control variables. The results show that the three selected capital structure variables have a significant negative impact on ROE, but none of the selected variables appear to have an impact on ROA. As for the controlling variables such as asset size and asset growth, the results show that asset size has a significant impact on ROE but not on ROA, while asset growth has no impact on any indicator of profitability. The increase in debts as a financing source reduces the net profits of banks, which means a decrease in financial performance indicators. These findings suggest that capital structure adjustment is important for optimising financial performance.