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Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks

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  • Seid Muhammed

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary
    Department of Accounting and Finance, College of Business and Economics, Salale University, Fitche P.O. Box 245, Ethiopia)

  • Goshu Desalegn

    (Doctoral School of Economic and Regional Sciences, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary
    Department of Accounting and Finance, Faculty of Business and Economics, Kotobe University of Education, Addis Ababa P.O. Box 5563, Ethiopia)

  • Prihoda Emese

    (Institute of Agricultural and Food Economics, Szent Istvan Campus, Hungarian University of Agriculture and Life Sciences, Páter Károly u. 1, 2100 Godollo, Hungary)

Abstract

This study aimed to examine the effects of capital structure on the financial performance of Ethiopian commercial banks. The dependent variable, financial performance, is measured by Return on Assets (ROA), while factors such as loan-to-deposit ratio (LDR), asset-to-total equity ratio (ATER), total deposit-to-total asset ratio (TDTAR), capital adequacy ratio (CAD), and asset growth ratio (GA) were used as proxy independent variables to gauge capital structure. Using a quantitative approach and an explanatory research design, this study analyzes 6 years of audited financial reports from 14 commercial banks in Ethiopia. This investigation employs a random effect regression model and Stata 14 software package to explore the relationships among these variables. The result revealed that both the loan-to-deposit ratio and the total deposit-to-total asset ratio have a positive and significant impact on financial performance, while the asset growth ratio showed a negative effect. Based on these findings, this study recommends that bank authorities concentrate on bolstering their deposit base, managing asset growth efficiently, maintaining adequate capital levels, and optimizing leverage levels to improve financial performance and ensure long-term sustainability in the banking sector. Additionally, this research is anticipated to inform policymakers about regulatory frameworks for banks and assist banking managers in formulating effective capital financing strategies within the Ethiopian commercial banking sector, thus enriching the existing literature on the relationship between capital structure and financial performance.

Suggested Citation

  • Seid Muhammed & Goshu Desalegn & Prihoda Emese, 2024. "Effect of Capital Structure on the Financial Performance of Ethiopian Commercial Banks," Risks, MDPI, vol. 12(4), pages 1-15, April.
    • Handle: RePEc:gam:jrisks:v:12:y:2024:i:4:p:69-:d:1378375
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    References listed on IDEAS

    as
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