Effect Of Capital Structure On Profitability In Banking Sector

Abstract

This study is conducted to analyze the impact of capital structure on the profitability of a bank. There is a conception that debt is a less costly source of financing and because of this banks are using debt to take advantage. Sample of 20 banks has been selected for analysis, which also included the top 10 Tier banks in Pakistan. Data has been collected from financial reports of the sampled banks. Fixed effect model has been used to analyze the relationship between variables. Analysis reflects the opinion that equity multiplier and gearing ratio are negatively correlated with the profitability along with size of the bank, burden capacity and efficiency ratio. Banks are required to control the increasing trend of using higher debt in capital structure because growing proportion of debt is emerging as a significant burden on them.