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Assessing the Relationship between Capital Structure and Financial Performance of Commercial Banks in Bhutan

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  • Lhaden, Rinchen
  • Tshering , Pema
  • Yangdon, Pema
  • Norbu, Samten
  • Chokey, Sonam

Abstract

This study examines the relationship between capital structure and the financial performance of Bhutan’s five commercial banks - Bank of Bhutan Limited (BOBL), Bhutan national Bank Limited (BNBL), Bhutan Developmental Bank Limited (BDBL), Druk Punjab Bank Limited (DPBL) and T Bank Limited from 2014 to 2023. Using audited annual reports, the study applied descriptive statistics and regression analysis to evaluate how debt ratio, equity ratio, and debt-to-equity ratio influence bank profitability measured through Return on Assets (ROA) and Return on Equity (ROE). Results show that debt financing and debt-to0equity mix have a statistically significant negative effect on ROA, while equity ratio demonstrates a statistically significant positive effect on ROA. In contrast, none of the capital structure variables exhibit a significant impact on ROE, suggesting that capital structure decisions affect asset efficiency more than shareholder returns for Bhutanese banks. The study concludes that reducing reliance on debt and improving equity-based financing may enhance asset profitability. Future research should incorporate boarder financial indicators and panel regression techniques to deepen understanding of capital structure dynamics within Bhutan’s financial sector.

Suggested Citation

  • Lhaden, Rinchen & Tshering , Pema & Yangdon, Pema & Norbu, Samten & Chokey, Sonam, 2025. "Assessing the Relationship between Capital Structure and Financial Performance of Commercial Banks in Bhutan," Bhutan Journal of Business and Management, Gedu College of Business Studies, Royal University of Bhutan.
    • Handle: RePEc:eoq:bjbmjr:art68
    DOI: 10.17102/bjbm.v8.5
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