The Effects of Capital Structure on Banks’ Profitability in Bangladesh

Abstract

This report attempts to measure the effects of capital structure on banking profitability listed in the Dhaka stock exchange. I considered 21 listed banks out of 30 using the data for the period of 2014-2018. Three profitability measures are used to understand whether the capital structure has any influence on the bank’s earnings. These are: return on assets, return on equity, and net interest margin. I applied the panel data regression model using both fixed-effects and random-effects models. But random effects panel regression has been found appropriate model applying the Hausman test for measuring the capital structure effect on the profitability of the banks. The results found that when the return on assets is used as a measure of profitability, both the capital structure ratios (total debt to asset and total debt to equity ratios) are found statistically significant. No other controlling variables except ROE have been found significant. When the return on equity is used as a measure of profitability, only the total debt total asset ratio has been found statistically significant. But no debt ratios have any significant influence on the bank’s profitability when net interest margin is used as a measurement of earnings variable. The conclusion can be made that only the total debt to total asset ratio can have a positive impact on influencing the profitability of commercial banks in Bangladesh. Other variables considered in the study do not have any significant impact on the bank’s profitability.