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RELATION BETWEEN CAPITAL STRUCTURE AND JAIZ BANK
PERFORMANCE
Jamilu Hussaini1
Abdulrasheed Bello2
Zubairu Ahmad3
Abstract
This study investigates relationship between capital structure and Jaiz
bank’s performance. The study adopts both the descriptive and historical
research to obtain and analyse data collected for a period of four (4) years from
2012-2015. The data was analysed using regression and correlation techniques.
Findings obtained from the regression results reveal that shareholders’ equity
as a component of the Bank’s capital structure is negative and significantly
related to performance as measured by gross earnings signifying that increase
in ordinary capital, retained earnings and reserves hurt total revenue and vice-
versa. This confirms that there is a significant relationship between
shareholders’ equity and gross earnings of Jaiz Bank. In addition, the results
also reveal that debt is significantly related to performance. The implication of
this finding is that external source of financing the bank is significant in
influencing performance of the Bank as evident in the regression output which
shows that there is a significant relationship between debt and gross earnings.
The study, therefore, recommends that management of Jaiz bank should
minimise the use of shareholders’ equity as it is detrimental to the Bank’s gross
earnings. The Bank should however increase its debt to a point where gross
earnings are the maximum. This is because high debt-equity is found to boost
performance as measured by gross earnings. In a nutshell, in line with extant
literature on Islamic finance, the Bank’s capital structure should be maximum
debt to equity ratio threshold of 40 per cent required for Islamic banks since
debt is positive and significantly related to performance.
Keywords: Capital structure, Performance, Jaiz bank,
Introduction
The importance of capital structure in the banking industry is derived
from the fact that it is tightly related to the ability of banks to fulfil the needs of
various stakeholders. Capital structure represents the major claims to a
1 Department of Business Administration, Usmanu Danfodiyo University, Sokoto,
Nigeria. 2 Department of Accounting Umaru Ali Shikafi Polytechnic, Sokoto.
3 Department of Accounting Umaru Ali Shikafi Polytechnic, Sokoto
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corporation’s assets. This includes the different types of both equities and
liabilities (Riahi-Belkaonui, 1999). The debt – equity mix can take any of the
following forms: 100% equity, 0% debt; 0% equity, 100% debt or mixture of
both debt and equity (Dare & Sola 2010). From these three alternatives, option
one is that of the unlevered firm, that is, an organisation shuns the advantage of
leverage or debt (if any). Option two is that of an organisation that has no equity
capital. This option may not actually be realistic or possible in the real life
economic situation, because no provider of funds will invest his money in an
organisation without equity capital. Therefore, it is the equity element that is
present in the bank’s capital structure that gives confidence to the debt providers
to provide their scarce resources to the business. Option three is the most
realistic one in that, it combined both a certain percentage of debt and equity in
the Capital Structure and thus, the advantages of leverage if any is exploited.
This mix of debt and equity has long been the subject of debate concerning its
determination, evaluation, accounting and overall impact on organisational
performance (Dare & Sola 2010; Akeem, Edwin, Monica & Adisa 2014).
Research on the theory of Capital Structure was pioneered by the
seminal work of Modigliani and Miller (1958). Significant empirical and
theoretical extensions followed and the broad consensus paradigm, at least until
recently, is that firms choose an appropriate (optimal) level of debt, based on a
tradeoff between benefits and cost of debt (Krishnan & Moyer, 1997). It has
also been argued that profitable organisation were less likely to depend on debt
in the capital structure than less profitable ones and those organisation with a
high growth rates have a high debt to equity ratios (Harris & Raviv, 1991;
Krishnan & Moyer, 1997; Zeitun & Tian, 2007).
In practice banks differ from one another in size, nature, earnings and
cost of funds, competitive conditions, market expectations and risk. For Islamic
banks their operations entirely are different from conventional banks. Islamic
banks are established with the mandate of conducting all their transactions in
conformity with Islamic precepts which prohibit, among other things, the receipt
and payment of interest. Unlike conventional (non-Islamic) commercial banks,
Islamic banks mobilise funds primarily via investment accounts using profit
sharing contracts Al-Deehani, Rifaat & Murinde; 1999).
Therefore, the concept of financial risk, on which modern capital
structure theories are based, have some striking differences with what obtains in
Islamic banks; the cost of capital in conventional banks represents the cost of
debt and equity deposit. However, while Islamic law is widely interpreted as
strongly discouraging the use of interest paying instruments such as debt, there
are Islamic debt-like instruments issued by banks. Instruments such as the
Muharaba and Ijara involve the purchase of an asset by the bank, with the firm
purchasing the asset from the bank at a fixed markup price over a period of time.
Some Islamic scholars believe these instruments, although widely used in
Islamic banking, should be avoided or restricted, as they may be a “back door”
for charging interest (Aggarwal & Yousef, 2000). Derigs and Marzban (2008)
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point out that, contemporary Islamic scholars do not necessarily call for Islamic
firms to have zero debt in their capital structure but instead suggest threshold
financial ratios within the range of 30-40 per cent to be an acceptable maximum
debt to equity ratio. Some Shari’ah Advisory Boards advocates for varying
financial ratios of debt to equity ratio that falls within the range of 33% to 49%
depending on the nature of debt instrument issued by banks or institution
operating in line with Shari’ah guidelines (Mahamood, 2009). Hence, Islamic
firms are not free to choose the level of debt they want in their capital structure
due to unfair return associated with debt financing (Thabet & Henefar, 2014).
Consequently, the conventional theories of Capital Structure provide only a
broad theoretical framework for analysing the relationship between leverage and
cost of capital and value of the bank for Islamic banks. However, it is the
responsibility of financial managers to make sure that there capital structure is in
conformity with Islamic banking guiding principles.
Debt financing which is a core component of capital structure, affects a
company’s performance because companies will usually agree to fixed
repayments for a specific period. These repayments occur regardless of the
company’s performance. Although equity financing typically avoids these
repayments, it requires companies to give an ownership stake in the company to
venture capitalists or investors. Thus, the choice of capital structure is
fundamentally a financing decision problem which becomes even more difficult
in times when the economic environment in which the company operates
presents a high degree of instability like the case of Nigeria. Hence, making
appropriate capital structure decision crucial for Nigerian banks.
Literature review on the on the impact of capital structure on bank
performance in both conventional and Islamic banks reported mixed results. The
actual impact of capital structure on corporate performance in Nigeria has been
a major problem among researchers that has not been resolved. Hitherto, there is
still no conclusive empirical evidence in the literature about how capital
structure influences corporate performance of organisations in Nigeria. Despite
the critical role of the capital structure in the banking sector and the association
between the level of banks’ capital structure and financial crisis (Naser, Al-
Mutairi, Al Kandari, & Nuseibeh (2015), as well as the possible reduction/loss
in the value derived from strategic assets due to poor capital structure decision
(Kochar (1997), there are limited studies that have been carried out to measure
the influence of capital structure on the performance of Islamic banks. This
means that there is little proof of the applicability of various theories of capital
structure to bank that offers Shariah compliant banking products and to the best
of our knowledge, no prior study has been conducted on how capital structure
impact on the performance of Jaiz bank that runs its operations in line with
principles of Islamic finance in Nigeria.
Against this backdrop and in line with the foregoing theoretical
considerations, this study examines the relationship between capital structure
and Jaiz bank performance. Specifically the study seeks to answer the following
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questions: (i) What is the extent to which shareholders’ equity influence gross
earnings of Jaiz Bank Plc? (ii) Is there any significant relationship between debt
and gross earnings of Jaiz Bank Plc? Accordingly, the study also hypothesised
that:
(i) there is no significant relationship between shareholders’ equity and gross
earnings of Jaiz Bank Plc
(ii) debt has no significant impact on gross earnings of Jaiz Bank Plc.
Literature Review
Meaning of Capital Structure
Capital structure refers to how a firm finances its overall operations and
growth by using different sources of funds. Debt comes in the form of bond
issues or long-term notes payable, while equity is classified as common stock,
preferred stock or retained earnings. Short-term debt such as working capital
requirements is also considered to be part of the Capital Structure. It denotes a
mix of company’s long-term debt, specific short-term debt, common equity and
preferred equity.
The term Capital Structure is used to represent the proportionate
relationship between the various long term forms of financing, such as
debentures, long-term debt, preference share capital and ordinary shares capital
including reserves and surpluses (retained earnings). Simply put it refers to the
proportion of debt to equity (Ajayi, 2007). A company’s proportion of short and
long-term debt is considered when analysing Capital Structure. When people
refer to Capital Structure, they are most likely referring to a firm’s debt-to-
equity ratio, which provides insight into how risky a company is. Usually a
company more heavily financed by debt poses greater risk, as this firm is
relatively highly levered (Abor, 2005). Capital Structure is referred to as the
ratio of different kinds of securities raised by a firm as long-term finance (Ebaid,
2009).
The capital structure involves two decisions: (a) Types of securities to
be issued are equity shares, preference shares and long-term borrowings
(Debentures) (b) Relative ratio of securities can be determined by process of
capital gearing. On this basis, the companies are divided into two: (1) Highly
geared companies – Those companies whose proportion of equity capitalisation
is small (2) Lowly geared companies – those companies whose equity capital
dominate total capitalisation.
Therefore, Capital Structure simply refers to the way a corporation
finance its assets through some combination of equity, debt, or hybrid securities.
A firm’s capital structure is then the composition or “Structure” of its liabilities.
For example, a firm that sells 20 billion Naira in equity and 80 billion Naira in
debt is said to be 20% equity-financed and 80% debt financed. The firm’s ratio
of debt to total financing, 80% in this example is referred to as the firm’s
leverage. In reality, Capital Structure may be highly complex and include
dozens of sources. Gearing ratio is the proportion of the capital employed of the
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firm which comes from outside of the business, e.g. by taking a short term loan,
etc.
The Modigliani-Miller theorem, proposed by Franco Modigliani and
Merton Miller, forms the basis for modern thinking on Capital Structure, though
it is generally viewed as a purely theoretical result since it disregards many
important factors in the Capital Structure process. The theory states that, in a
perfect market, how a firm financed is irrelevant to its value. This result
provides the base with which to examine real world reasons why Capital
Structure is relevant, that is, a company’s value is affected by the Capital
Structure it employs. Some other reasons include bankruptcy costs, agency
costs, taxes and information asymmetry. This analysis can then be extended to
look at whether there is in fact an optimal Capital Structure: the one which
maximises the value of the firm.
In extant literature (Amidu, 2007; Gatsi & Gadzo, 2013; Shaba, Yaaba
& Abubakar, 2016), various firm level and industry specific characteristics are
critical determinants of capital structure of firms. These characteristics
according include firm age, firm size, firm risk, asset structure, profitability,
growth, tax and ownership structure
Capital Structure of Islamic Banks
Islamic banks are established with the mandate of conducting all their
transactions in conformity with Islamic precepts which prohibit, among other
things, the receipt and payment of interest. Unlike conventional (non-Islamic)
commercial banks, Islamic banks mobilise funds primarily via investment
accounts using profit sharing contracts. The concept of financial risk, on which
modern capital structure theories are based, is not relevant to Islamic banks.
This is due to the fact that the contractual obligations in the Islamic banks
require shareholders and investment account holders to share profits from
investments (Talla, Rifaat, & Victor, 1999).
Islamic debt includes no periodic interest payments and provides a
different cash flow profile when compared with non-Islamic debt instruments
for borrowing companies and lenders. There is a socio-religious dimension
relating to major principles that underlie all business transactions under Islamic
law. All business transactions must adhere the teaching of the Islamic
foundation, which is the Quran and Sunnah. There are at least four major
prohibitions in Islamic business transactions. The first is the prohibition of Riba,
known as adding any interest payments to a loan or other financing contract.
The second is the prohibition from Gharar and Maisir, known as uncertainty
and gambling; so transactions embodying these attributes will be considered
invalid. The third is the prohibition of Non-Halal business transactions, such as
alcohol, gambling and any other things that are prohibited and considered as
non-halal. The fourth is the general prohibition of contracts that fail to meet the
highest Shariah standards (Ayub, 2007; Fauzi, Locke, Basyith and Idris (2015).
The uniqueness of Islamic debt compared to non-Islamic debt is that Islamic
debt offers a secure investment based on the principle of rent and profit sharing
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without legalised interest system. It is constituted by pure motive of cooperation
based on Islamic law. How the market prices this security in term of the yield
curve and how risk pricing is embedded in the value and performance of the
firms (Fauzi et al, 2015).
Optimal Capital Structure
The optimal Capital Structure indicates the best debt-to-equity ratio for a
firm that maximises its value. Putting it simple, the optimal capital structure for
a company is the one which proffers a balance between the debt-to-equity
ranges, thus minimising the firm’s cost of capital. Theoretically, debt financing
usually proffers the lowest cost of capital because of its tax deductibility.
However, it is seldom the optimal structure for as debt increases, it increases the
company’s risk.
The short and long term debt ratio of a company should also be
considered while examining the structure. Capital Structure is most commonly
referred to as a firm’s debt-to-equity ratio, which gives an insight into the level
of risk of a company for the potential investors. Abor (2005) opines that
estimating an optimal capital is a key requirement of a company’s corporate
finance department.
Estimating the Optimal Capital Structure
There are numerous ways in which a company’s optimal Capital
Structure can be estimated as provided for in the literature. Following the work
of Menk (2004), four methods were identified as follows:
Method One: One of the several ways to estimate a company’s optimal capital
structure is to assume that other companies in the industry are operating at or
near their optimal capital structures and to obtain published industry statistics.
While this method is useful in some cases, these industry statistics are
conglomerates of data and often include companies that are not sufficiently
similar to the subject company. Also, the time frame in which the data was
collected may be unclear or may not be in reasonable proximity to the date of
valuation. For these reasons, published industry statistics alone many not
provide a meaningful or accurate measure of an appropriate capital structure
Menk (2004).
Method Two: Utilising Guideline Companies. One way to estimate the subject
company’s optimal capital structure is to utilise the average or median capital
structure of the guideline companies employed in the market approach. This
approach is useful because the appraiser is well aware of which companies are
included in the analysis and the degree to which they are similar to the subject
company. The drawback is that, again, fluctuations in market prices and the
staggered nature of debt offerings and retirements may cause the actual capital
structure of a guideline company to be substantially different than its target
capital structure. This issue is mitigated somewhat when numerous guideline
companies exist and it becomes more likely that an average or median capital
structure truly reflects an optimal capital structure.
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Unfortunately, in many valuation engagements the subject company is relatively
unique and the appraiser is unable to find publicly traded companies that are
comparable. In these cases, it may be necessary to rely on methods that focus on
the specific characteristics of the subject company.
Method Three: Lending Guidelines. If the risk of a company did not change
due to the nature of its capital structure, a company would want as much debt as
possible, since interest payments are tax deductible and debt financing is always
cheaper than equity financing. The reality, however, is that a company’s risk
profile does increase as more debt is added, since the company’s debt coverage
ratios deteriorate and its ability to survive a downturn shrinks. Therefore, the
required rates of return for both debt and equity holders increase as debt is
added, since investors require additional returns to compensate for the increased
risk.
The objective of the business valuation professional is to determine the
level of debt at which the benefits of increased debt no longer outweigh the
increased risks and potential costs associated with a financially distressed
company because a company would want to maximise the amount of leverage in
its capital structure without incurring undue risk, an appropriate gauge for
determining the level of debt is the amount that lenders would be willing to loan
to the company. If the subject company’s industry attracts specialty lenders (e.g.
franchise restaurants, real estate, etc.), the appraiser may be able to talk to loan
underwriters or obtain literature that would indicate the criteria used for making
loans.
Method Four: Synthetic Cost of Capital Curve. The most complex of the
various methods for estimating an optimal capital structure is through the
construction of a cost of capital curve. The curve illustrates the company’s
weighted average cost of capital at all combinations of debt and equity
financing.
Review of Empirical studies
This study will not be complete without taking a critical look at some
past empirical studies in terms of the purpose of the studies, the methodologies
that were adopted and the findings of the studies as are related to this current
study. A brief review of studies on capital structure in both conventional and
Islamic banks is provided hereunder:
Capital Structure in Conventional Banks
In an attempt to investigate the impact of capital structure on bank
performance, Awunyo-Vitor and Badu (2012) empirically examine the
relationship between capital structure and performance of 7 listed Ghanaian
banks from 2000 to 2010. The authors employ debt to equity ratio as an
independent variable; return on assets, return on equity and Tobin’s Q as proxies
for bank performance and firm size, firm age, current liability and board size as
control variables. The study which uses panel regression methodology revealed
that the sampled banks are highly levered and this is significantly negatively
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related to their return on equity and Tobin’s Q. The study also showed an
insignificant negative impact of capital structure on return on assets. The authors
attributed these findings to the banks’ over-dependence on short-term debt
which gives rise to high bank lending rate and low level of bond market
activities. The study recommends among others the need for Ghanaian listed
banks to rely more on internally generated funds to finance their activities and
that where debt would be used, the banks should search for low interest-bearing
ones so that the tax shield benefit of the loan will exceed the financial distress
associated with it.
Idode, Adeleke, Ogunlowore and Ashogbon (2014) examine the
influence of capital structure on profitability of Nigerian banks from 2008 to
2012 using expost-factor research design and multiple regression technique. The
study employs return on assets (ROA) measured as earnings before taxes (EBT)
divided by total assets as a measure of bank performance and total debt to total
assets ratio and total equity to total assets ratio as independent variables. The
findings show that capital structure has a significant positive influence on
profitability of Nigerian banks. On the basis of this finding, the study
recommends that directors and management should use both equity and debt in
financing their business activities as supported by the pecking order and agency
theories.
Similarly, Adesina, Nwidobie and Adesina (2015) examine the impact
of post-consolidation capital structure on the financial performance of 10
Nigerian banks for the period 2005 through 2012. The study which employed
profit before tax as a dependent variable, equity and debt as independent
variables and Ordinary Least Squares as a regression technique shows that
capital structure has a significant positive relationship with the profitability of
Nigerian quoted banks. The authors suggest among others the use of debt and
equity capital in financing Nigerian banks to improve earnings.
Shaba, Yaaba, and Abubakar (2016), empirically examined the impact
of capital structure (owners’ funds and borrowed funds) on bank profitability in
Nigeria. Applying autoregressive distributed lag model on a sample of 13
Deposit Money Banks (DMBs) from 2005 through 2014, the study found that
about 83 per cent of total assets employed by the DMBs are not financed by
owners, confirming the hypothesis that banks are highly levered institutions.
Consistent with the agency and static trade-off theories of capital structure and
earlier empirical findings in Nigeria, the results further found evidence of a
positive and significant influence of both owners’ and borrowed funds on
profitability. However, borrowed funds were found to be more prevalent in
enhancing the performance of DMBs during the study period. Following these
findings therefore, the study recommends that DMBs should study and
understand the dynamics of capital structure to enable them make optimal
capital mix decision. In addition, since debt is more critical in boosting
profitability of banks in Nigeria, DMBs should employ more debt than equity in
financing real investment with positive net present values. The management and
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board of directors of DMBs should incentivise lenders and depositors so as to
enhance easy access to funds other than shareholders. Additional incentives on
depositors’ and creditors’ funds such as increase in their returns are capable of
attracting more funds from the investing public to create assets.
Capital Structure in Islamic Banks
Milhem (2017) examine the impact of capital structure towards
performance of Islamic and conventional banks in Jordan during the period
2010-2015. Ratio analysis and regression analysis are used to test the research
hypothesis. Performance is measured by return on equity (ROE), return of asset
(ROA) and earnings per share (EPS). Capital structure measured by Total debt
to total equity (TD/TE), Total debt to total assets (TD/TA), and total equity to
total assets (TE/TA), Size and Age are control variables. The results show that
capital structure affects financial performance of the Jordanian Islamic banks
significantly, while there is no statistically significant effect of capital structure
on Jordanian conventional banks performance
Fauzi et al, (2015) undertook an empirical study that lends credence on
theories on capital structure and their application in Islamic finance. The study
explores the impact of Islamic debt (sukuk) on the value of the issuing company.
They find evidence in support of the tradeoff theory of capital structure, which
posits that companies actively decide between equity or debt issuance by
assessing costs and benefits. In their sample, they found evidence that suggests
that the issuance of sukuk was positively associated with an improvement in the
financial performance of the firm, perhaps due to the associated tax benefits.
The result reveals that Islamic debt has a significant positive impact on company
value and firm financial performance. It also confirms that trade-off theory
holds well in the Malaysian context for Islamic debt financing. Furthermore, the
coefficient for Islamic debt is higher than the coefficient for non-Islamic debt,
suggesting that the Islamic debt provides a higher contribution to firm value and
to the improvement of firms’ financial performance compared to non-Islamic
debt.
Rajha and Alslehat (2014) test the impact of capital structure on the
performance of the Jordanian Islamic Banks, through multiple regression model.
The model included a sample of two Islamic banks: Jordan Islamic Bank (JIB)
and Islamic International Arab bank. The sample of the study relied on annual
statements of Islamic bank for the period (1998-2012). By using several
financial ratios represented the Independent variable: (Equity Ratio, Total
Assets, Ratio of Financing to Total Assets, Ratio of liquid Assets of total asset
and concentration Ratio “Index Hervndal”). The dependent variable is the
performance was measured using a scale Tobin Q. The results of study found a
positive impact for each: (Equity Ratio, Total Assets and Ratio of financing to
Total Assets) on performance. And the concentration Ration “Index Hervndal”
had negative impact on performance, and there is no impact to the Ratio of
liquid Assets to Total asset on the performance of Islamic banks in Jordan.
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In a similar study, Yahaya and Yahahya (2015) examine the financial
performance of Jaiz Bank Plc in Nigeria, over a period of two years (2013–
2014). The study examines the financial performance of the bank in terms of
profitability, liquidity, leverage and growth. Time series data were collected and
analysed by way of Gray Comparative Index. The study finds positive
relationship between profitability, leverage, growth ratios and financial
performance. There is sufficient evidence also that shows that the relationship
between liquidity and financial performance is negative. The study therefore
recommends that bank managers should take measures to improve profitability
by taking advantage of leverage and growing their banks. They should be
careful in keeping liquidity beyond desirable level since liquidity and financial
performance have negative relationship.
Sagara (2015) analysed the impact of capital structure on financial
performance in Islamic banks listed on the Indonesia Stock Exchange (IDX) in
2014. Capital structure is calculated by using total debt to equity capital ratio,
whereas financial performance is calculated by using capital, assets, earnings,
and liquidity ratios. The population of this study is all Islamic banks listed on
the IDX in 2014. Total sample is seven Islamic banks which are determined by
purposive sampling. Secondary data is collected from published financial
statements of the Islamic banks for a period of five years (2010-2014). The
analyses used are descriptive method which describes data objectively and
verification method which uses simple linear regression, where the independent
variable is capital structure and the dependent variable is financial performance.
Tests are carried out with 95% confidence level. The results show that capital
structure affects financial performance of the Islamic banks significantly by
69%. This implies that the greater the capital structure of the Indonesian Islamic
banks is, the higher the Indonesian Islamic banks performance will be, and vice
versa.
In summary, the most important finding from the empirical studies
reviewed above is that capital structure has significant relationship with
financial performance of banks in both Islamic and conventional banks, but
some few studies indicate lack of significant relationship. Thus, the mixed
findings call for further investigations into the relationships between capital
structure and firms performance.
Research Methodology This section discusses the methods employed to examine the
relationship between capital structure and performance of Jaiz Bank Plc. It
further discusses the procedures used in collecting data, the model specification
and method of data analysis adopted. In this process, data were collected from
the annual reports of Jaiz Bank Plc. It further specified the tools used for
analysis in order to examine the relationship between capital structure and
performance.
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Research Design
This study adopts both the descriptive and historical research designs
due to the nature of the study; historical research means a search to find out
facts from an integrated narration of past events. The purpose of historical
research is to give clear perspective of the present problems which can be better
understood on the basis of past history. The descriptive research on the other
hand describes the time series of data in a detailed presentation. The population
of the study is basically Jaiz Bank Plc being the only non-interest (Islamic) bank
in the Nigerian banking industry. To obtain the desired sampling size, all the
available annual reports (2012–2015) of the bank were selected for data
analysis. Therefore, secondary data obtained from the annual reports of Jaiz
Bank Plc that covered the period, 2012 through 2015 were used. The following
information was obtained from the reports: Shareholders’ Equity, Total Debt
(Debt) and Gross Earnings (GE).
Data collected were analysed using Regression analysis to determine the
relationship between the dependent variable (Gross Earnings) and independent
variables (capital structure) represented by equity and debt. Correlation co-
efficient was also used to measure the strength and direction of the relationship
between both variables. The data analysed was for a period of four (4) years
from 2012 – 2015.
Model Specification
In the first relationship, leverage level represents as dependent variable,
and the determinants of capital structure are the independent variables. Namely,
growth opportunities, firm size, firm risk, liquidity and business risk. The
second study implies six independent variables to identify what were
determinant capital structure and its impact on bank performance (ROA) that
includes firm leverage, growth, firm size, tangibility of fixed assets, liquidity
and business risk as independent variables and performance (ROA) the firm as
dependent variable. The generalised form of the empirical model takes the
following form: Where:
- is dependent variable, Gross Earnings,
α - is the intercept (constant variable),
- is a vector of the explanatory variables (Equity and Debt),
- is the error term and subscript t being the number of time periods.
From the generalised equation presented as equation (3.1), the specific form of
the estimated equation is detailed as follows:
Where GE represents gross earnings, Equity connotes the value of ordinary
shareholding, retained earnings and reserves, Debt denotes total liabilities of the
bank, µ is the error term, α, β, and ϑ are the coefficients of their respective
variables and subscript t is time dimension.
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Empirical Results
The empirical result for ease of analysis is divided into descriptive and
inferential results. While descriptive results explore the characteristics of the
data collected and consolidated, the inferential results examine the relationships
among the variables investigated. This section employed descriptive statistics;
correlation analysis and ordinary least squares regression analysis to analyse the
data collected. The analysis followed the methodology specified in section three.
Descriptive Statistics
The descriptive statistics displayed in Table 1 explore the characteristics
of the data and include; the mean, median, maximum, minimum, standard
deviation, skewness, kurtosis, Jarque-Bera, probability as well as number of
observations per each variable.
The sampled bank reported average gross earnings of N2.25 billion, a
mean shareholders’ equity of N1.09 billion, an average value of debt of N2.53
billion with the standard deviations computed at N2.13 billion, N5.79 billion
and N1.61 billion respectively. The deviations from the averages of these
magnitudes signify that Jaiz Bank Plc did not generate similar gross profits and
did not employ similar amount of owners’ and borrowed funds in its operations
for the years under consideration. The results further suggest that about 70 per
cent of total assets employed by Jaiz Bank Plc are represented by debt,
confirming the hypothesis that banks are highly geared institutions.
Whilst the minimum gross earnings of the studied bank stood at N79.56
million, the maximum is N4.89 billion. However, when the minimum
shareholders’ equity is found to be N10.1 billion, the maximum stood at N11.4
billion. For debt, the minimum and maximum are N4.01 billion and N4.12
billion respectively. The implication of these findings is that Jaiz Bank Plc uses
more of debt than equity which profits the owners than the creditors in good
times, but harmful when performance is very low.
GE SE Debt
Mean 2.25E+09 1.09E+10 2.53E+10
Median 2.02E+09 1.11E+10 2.81E+10
Maximum 4.89E+09 1.14E+10 4.12E+10
Minimum 79560000 1.01E+10 4.01E+09
Std. Dev. 2.13E+09 5.79E+08 1.61E+10
Skewness 0.265564 -0.835473 -0.485424
Kurtosis 1.563386 2.076235 1.829947
Jarque-Bera 0.390993 0.607567 0.385262
Probability 0.822426 0.738021 0.824786
Observations 4 4 4
Table 1: Descriptive Statistics
Source: Authors Calculation using Eviews Version 7.0.
Relation between Capital Structure and Jaiz Bank Performance
Sahel Analyst: ISSN 1117- 4668 Page 39
The statistics also showed that both shareholders’ equity and debt are
asymmetrical as their means and medians reported disparate numerical values.
The aforementioned variables are, however, negatively skewed implying that a
greater proportion of the items are concentrated on the left hand side of the
distribution, gross revenues are skewed to the right. The lowest Kurtosis of 1.56
for GE and the higher of 2.08 for SE further denote the variance of the capital
structure components of the Bank throughout the study period.
Correlation Analysis
Table 2 presents the correlation results on shareholders’ funds and debt.
It gives the degree of correlation and the direction of the relationship. It reveals
positive relationships among all the variables.
The associations of GE and SE, and that of GE and Debt are 87.4 and
94.2 per cents respectively while that of SE and Debt stands at 98.6 per cent.
Inferential Results
The estimated results are presented in Table 3 the table juxtaposes the
relationship between gross earnings and the explanatory variables. It is
pragmatic that shareholders’ equity is negative and significant in explaining
movements in gross earnings of Jaiz Bank Plc. The implication of this result to
the Bank is that the more this component of capital structure, the worse the
gross revenue and vice-versa.
On the other hand however, the statistically significant positive
relationship between debt and gross earnings symbolises the importance of high
debt-equity ratio on performance of the Bank as measured by gross earnings.
The implication of this finding is that the more the Bank employs outside
Variables GE SE Debt
GE 1.000 0.874 0.942
SE 1.000 0.986
Debt 1.000
Source: Authors Calculation using Eviews Version 7.0.
Table 2: Correlation Matrix
Variable Coefficient Std. Error t-Statistic Prob.
C 7.390E+10 4.760E+09 1.554E+01 0.0409
SE -7.467E+00 4.744E-01 -1.574E+01 0.0404
Debt 3.902E-01 1.708E-02 2.285E+01 0.0278
R 2 0.9995 Hannan-Quinn criter. 38.3026
Adj.R 2
0.9986 Durbin-Watson stat 3.1948
AIC 39.3126 1104.3030
SBC 38.8523 Prob(F-statistic) 0.0213
F-statistic
Table 3: Empirical Results
Sahel Analyst: Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri
Sahel Analyst: ISSN 1117-4668 Page 40
financing against internal financing the better the performance in terms of gross
earnings. The reverse also holds.
From the results presented in Table 3, the adjusted R2 is 0.9986
implying that about 99.9% of gross earnings are determined by shareholders’
equity and debt which is considered to be a very high influence. The F-statistic
of 1104.3 is also significant at 5.0% suggesting that variations in gross earnings
of Jaiz Bank Plc are adequately explained by the independent variables in the
model.
Test of Hypotheses and Discussion of Finding
Two hypotheses were raised based on research questions in section one.
Hypothesis 1 predicts no significant relationship between shareholders’ equity
and gross earnings of Jaiz Bank Plc. Considering the estimated results in Table
3, shareholders’ equity as a component of the Bank’s capital structure is
negative and significantly related to performance as measured by gross earnings
signifying that increase in ordinary shareholding, retained earnings and reserves
hurt total revenue and vice-versa. The study therefore rejects the hypothesis that
there is no significant relationship between shareholders’ equity and gross
earnings of Jaiz Bank Plc. This finding is in support of the evidences reported
by Awunyo-Vitor and Badu (2012) in respect of Ghanaian banks and Akeem,
Terer, Kiyanjui and Kayode (2014) in respect of Nigerian non-financial
institutions who reported significant negative impacts of owners’ equity on
profitability of the 10 sampled firms considered covered by their study. It also
corroborates the findings of Yahaya and Yahahya (2015) that examine the
financial performance of Jaiz Bank Plc in Nigeria, over a period of two years
(2013–2014) and found that also that the relationship between liquidity and
financial performance of the bank is negative.
From hypothesis 2, it is predicted that debt does not have any significant
impact on bank gross earnings. However, from the regression results in Table 3,
the coefficient of debt is significantly related to performance. The implication of
this finding is that external source of financing the bank is significant in
influencing performance of the Bank as evident in the regression output with
probability value of 0.0278. From Equation 2 therefore, hypothesis 2 is rejected
because there is a significant relationship between debt and gross earnings. The
significant positive impact of debt on performance supports the empirical
findings of Idode, Adeleke, Ogunlowore and Ashogbon (2014), Adesina,
Nwidobie and Adesina (2015) and Shaba, Yaaba, and Abubakar (2016) when
they examined Nigerian Deposit Money Banks. It also agrees with findings of
earlier studies (Pratomo & Ismail, 2007; Yahaya & Yahahya, 2015) that
examine the relationship between capital structure and performance of Islamic
banks.
In addition to the above discussions, the P-values of 0.0409 for
shareholders’ equity and 0.0278 for debt signify a significant relationship
between capital structure and gross earnings of Jaiz Bank Plc. The study
Relation between Capital Structure and Jaiz Bank Performance
Sahel Analyst: ISSN 1117- 4668 Page 41
therefore rejects the hypotheses that there is no significant relationship between
capital structure and gross earnings.
Conclusion and Recommendations
In general, the market value of a bank is positively significantly
influenced by its choice of capital structure. More specifically, there is positive
effects of long term financial leverage of the market value of firms as suggested
by other research on the studies as in Modigliani and Miller, 1963 and Mollik,
2008 among others, but in sharp contrast to the pecking order theory as
propounded by Donaldson (1961), which assumes a firm’s capital structure is
irrelevant to its market value and that a firm’s choice of capital structure should
follow a well-defined order, starting with internal funds, then debt and finally
equity capital. The theory of optimum capital structure is justified on the ground
that it has an empirical significant positive impact on the bank’s market value.
Furthermore, it is obvious that a bank’s choice of capital structure is
significantly influenced by its size, profitability, costs of capital, associated
risks, shareholders opinions, level of development of the Nigerian stock market
and the equity of personnel managing the finance function of the banks in
Nigeria. It was discovered that the combination of both equity and debt capital
constitute the general pattern in the capital structure of Jaiz bank.
However, there is not yet an ideal mix of debt-equity capital that
constitutes an optimal capital structure for an Islamic bank it was also
discovered that Jaiz bank was majorly financed through the uses of short-term
capitals, long-term capitals and retained earnings.
The study, therefore, recommends that management of Jaiz bank should
minimise the use of shareholders’ equity as it is detrimental to the Bank’s gross
earnings. The Bank should however increase its debt to a point where gross
earnings are the maximum. This is because high debt-equity is found to boost
performance as measured by gross earnings. In a nutshell, in line with extant
literature on Islamic finance, the Bank’s capital structure should be maximum
debt to equity ratio threshold of 40 per cent required for Islamic banks since
debt is positive and significantly related to performance.
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