The Effect of Debt Financing on Profitability of Nepalese Commercial Banks

Abstract

This study examines the effect of debt financing on the profitability of the Nepalese commercial banks. The banks’ profitability has been measured in terms of return on assets, return on equity and net interest margin and these three are the dependent variables. The independent variables are short term debt to total assets, long term debt to total assets, total debt to total assets, debt to equity ratio and interest coverage ratio and size. The data are collected from various issues of Banking and Financial Statistics and Bank Supervision Report published by Nepal Rastra Bank and annual reports of selected commercial banks. The study is based on 148 observations from 22 commercial banks of Nepal for 2008 to 2014. The regression models are estimated to test the significance and importance of the effect of debt financing on profitability of Nepalese commercial banks. The result shows positive relationship of banks’ profitability with short term debt to total assets, interest coverage ratio and size of the banks. It indicates that increase in short term debt to total assets, interest coverage and size lead to increase in bank profitability. However, profitability is negatively related to long term debt to total assets, total debt to total assets and debt to equity ratio. The regression result shows that beta coefficients are positively significant for short term debt to total assets, interest coverage ratio and size of the banks with profitability. Whereas the beta coefficients are negatively significant for long term debt to total assets, total debt to total assets and debt to equity ratio with profitability.