The Effect of Capital Structure Management on Commercial Bank Financial Performance: A Case of the Zambian Banking Sector

Abstract

This paper endeavoured to determine the effect of capital structure management on commercial bank profitability in Zambia using the explanatory research design. Panel data extracted from individual bank monthly financial statements for the period between 2010 and 2017 was used in the study. The study used the Fixed Effects regression model to analyse the data set. Granger causality testing was conducted to define the direction of causation between the two variables. The study established an insignificant and negative effect of equity financing on commercial bank financial performance in Zambia. It was also found that the two variables have a bidirectional causal relation in the long term. This finding implies that even though the extent of equity financing has a small and negligible effect on commercial bank financial performance, the management of capital structure cannot be completely ignored due to its long term causal influence on the profitability of banking enterprises. The study recommends that bank managers must passively manage capital structure and minimize the utilization of equity capital to realize long term banking business profitability, survival and growth. It is also recommended that bank managers must actively manage other variables with significant effect on bank profitability to maximize short and long term financial performance.