The Effect Of Debt Financing On Firm Profitabilty Of Commercial Banks In Kenya

Abstract

The effect of debt financing on firm profitability is of considerable importance to all firms. Banks are especially sensitive to changes in financial leverage due to their low level of equity capital to total assets. Currently most of the commercial banks have engaged in the expansion program which require huge amount of capital, which in most cases bank are turning to debt financing this made me to do research of effect of debt financing on firm profitability of commercial banks here in Kenya. Therefore, the objective of this study was to establish the effect of debt financing on firm profitability, a case commercial bank in Kenya. The study was descriptive in nature and used a census method of all the 43 commercial banks. The study period covered a 5-year period (2008 – 2012). The study used a Pearson Correlation Analyses to examine the relationship between independent variables banks profitability and the dependent variables banks capital. Multiple linear regresion analsysis was also used to achieve the same. The findings show positive relationship between short term debt (SDA) and profitability since short-term debt tends to be less expensive and increasing it with a relatively low interest rate will lead to an increase in profit levels and hence performance. A negative association was established between long term debt (LDA) and profitability. The study recommends that owing to the less cost incurred in obtaining short term loans than long term ones, banks should go for short term loans since despite changing the firm's capital structure to the worse.