THE EFFECTS OF CAPITAL STRUCTURE ON GROWTH IN INTEREST BEARING ASSETS BY THE COMMERCIAL BANKS IN KENYA
Joan Nzeli Muthui - Master of Science in Finance and Investment, Kenya Methodist University, Kenya
Benard Baimwera - Kenya Methodist University, Kenya
Doreen Mutegi - Kenya Methodist University, Kenya
ABSTRACT
The objective of this study was to determine the effects of capital structure on the growth of interest bearing assets by commercial Banks in Kenya, between the years 2010 to 2014. The capital structure has been defined as the overall means by which entities finance their assets across the blend of debt, equity and retained earnings/reserves. On the other hand, since financial institutions majorly rely on interest incomes as their main source of incomes, examining how capital structure variables will affect the growth of the interest bearing assets to generate interest revenues which will translate to profitability was our main objective. The capital structure theories were discussed and related to the study variables in order to establish the gap and in addition the related empirical studies carried out reviewed in order to clearly bring out the problem statement of the study. The study adopted a descriptive design in its methodology and the researcher chose to study commercial banks due to availability of needed data and convenience. All the licensed 43 commercial banks in Kenya which existed between years 2010-2014 in their different tiers were the target for this study. Secondary data was obtained from the annual Central bank of Kenya Banks supervision reports. SPSS version 20.0 was used for data analysis due to its capability to analyze the voluminous data and equations adopted in the study. The t-test with a 5% level of significance was also used in the study and the correlation coefficient (r), coefficient of determination and analysis of variance (ANOVA) was calculated. This study found out that for tier I and II banks, there is a weak correlation between the capital structure and the growth of interest bearing assets. Thus the capital structure components cannot significantly predict the growth in interest bearing assets since this growth is largely determined by other variables such as customer deposits and other borrowings. For tier III banks, the study found a strong correlation between the capital structure components and thus concluded that the growth of interest bearing assets can be significantly predicted by the capital structure components. Unlike tier I and II banks, tier III banks have low levels customer thus rely largely on capital for investments.
