The link between capital structure and banking sector performance in an emerging economy

Abstract

South African banks are small compared to the international standards and this necessitates them to remain efficient and competitive at both national and international levels. Such competitiveness shelter them from global competitors wishing to enter into the South African market. Putting in mind the critical role played by banks in the economic development of every country, managers in the banking industry should ensure they make sound financial decisions in order to remain profitable and competitive amidst challenges of the debt-equity choice. This study seeks to determine the influence of capital structure on profitability of banks listed at the Johannesburg stock exchange (JSE) using the random effect regression model. Empirical studies that studies the impact of capital structure on profitability of the banking sector in emerging markets and Africa are very scant. The few empirical studies that focused on the banking sector are yet to focus on African and to agree on the relationship between capital structure and profitability. It is against these reasons that the current study chose to investigate how profitability of South African banks is affected by their capital structure. The study found out that capital structure is a key determinant of profitability of banks in South Africa. As such, the study recommends that optimal capital policies need to be pursued if banks are to not only to increase profitability but ensure long term stability and sound performance.