IMPACT OF CAPITAL STRUCTURE AND PROFITABILITY OF NEPALESE COMMERCIAL BANKS

Abstract

Financial system in broad and banking system in specific is one of the energetic elements for the economic development of the country. So, it is essential to control and regulate bank operation by the apex institutions to protect customers and depositors to make sure customer’s safety, strengthen and promote soundness, stability, and efficiency of the banking system. Inefficiency in the banking performance may cause financial crisis which invites the economic breakdown as happened in USA in 2007 (Marshall, 2009). Capital structure of a firm describes the way in which a firm raises capital needed to establish and expand its business activities. The capital structure decision is one of the most important decisions made by financial managers in this modern era. The capital structure decision is at the center of many other decisions in corporate finance. One of the many objectives of a corporate financial manager is to ensure low cost of capital and thus maximize the wealth of shareholders. The study attempts to examine the determinants of capital structure in Nepalese commercial banks. Return on assets and net interest margin are the dependent variables. The independent variables are total debt to total assets ratio and total debt to total equity ratio, capital adequacy ratio, short term debt to assets, and bank size. The study is based on secondary data of from 3 commercial banks in Nepal for the period of 10 years from 2012/13 to 2021/22. This sample size represents the 30 percent of the population which is representative and commendable of Nepalese commercial banks. The secondary data used are of annual in nature. The secondary data are collected from the Banking and Financial Statistics and bank supervision report published by Nepal Rastra Bank and annual reports of the selected commercial banks. The descriptive statistics shows that bank size has highest average return and return on assets has lowest average return of Nepalese commercial bank. This study reveals the correlation test between both dependent and independent variables using correlation coefficient matrix. The correlation test shows that total debt to total asset, short term debt to assets, bank size has inverse relationship with return on assets of Nepalese commercial bank with 1 percent level of significance. Likewise total debt to total equity, capital adequacy ratio has positive relationship with the return on assets.

Similarly, total debt to total asset, total debt to total equity, short term debt to assets and bank size has inverse relationship with net interest margin with significance level and positive relationship with the capital adequacy ratio with net interest margin of commercial bank.