EFFECT OF CAPITAL STRUCTURE ON FINANCIAL PERFORMANCE IN COMMERCIAL BANKS IN MOMBASA COUNTY, KENYA

Abstract

The general purpose of the study was to assess effects of capital structure on financial 
performance of Commercial Banks in Mombasa County. The specific objectives were: 
Investigate the effect of debt finance on financial performance of commercial banks in Mombasa 
County, Kenya, Examine the influence of Equity finance on financial performance of 
commercial banks in Mombasa County, Kenya, Determine the effect of cost of debt on financial 
performance of commercial banks in Mombasa County, Kenya, Establish the effect of dividend 
policy on financial performance of commercial banks in Mombasa County, Kenya. The theories 
employed relevant to the study were, Modigliani and Miller theory, Trade-off theory, Pecking 
order theory, Agency theory & Bird in hand theory. The Target population of the study was 127 
respondents from 25 commercial banks based on their banking industry stability and 
performance, using simple random sampling technique the researcher arrived at a sample of 98 
respondents from the 25 commercial banks ensuring the core banking departments are 
represented from marketing, retail and operations to credit advances. The primary data was 
collected using structured questionnaires administered to the 98 respondents, adopting 
Descriptive research design in collecting data. Only 64 respondents returned the questionnaires. 
Secondary data was obtained from published financial statements between the periods of 2014-
2018, being 5 years period of study. Test for validity was done by use of Kaiser-Meyer-Olkin 
Measure of Sampling Adequacy the value was 0.538 hence useful. Bartlett's test of sphericity 
tests the hypothesis that the variables used for the study were related, value less than 0.05 
significance value is satisfactory, the value was at 0.00 significance level. The value of reliability 
test was done by use of Cronbach Alpha, the values for all the variables were greater than 0.7 
hence satisfactory. The study revealed that there is no significant effect demonstrated by debt 
finance measured by Total Debt Asset Ratio and dividend policy measured by Dividend Pay-out 
Ratio with financial performance (ROA & ROE) as per their p-values of 0.526 & 0.230 
respectively by use of primary data. While there was significant positive effect on financial 
performance (ROE & ROA) with equity finance (Proprietary Ratio) and cost of debt (Interest 
Cover Ratio) as per p-values 0.009 & 0.002 respectively. On data analysis of secondary data the 
results revealed significant positive effect on financial performance (ROE & ROA) with Equity
finance (Proprietary Ratio) and Cost of Debt (Interest Cover Ratio) with p-values of 0.033 and 
0.00 respectively.