THE IMPACT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF COMMERCIAL BANKS IN CAMEROON. THE CASE STUDY OF CREDIT COMMUNAUTAIRE D’AFRIQUE BANK (CCA BANK)

Abstract

This report is on ’the effect of capital structure on banks profitability” CCA BANK” with the main objective of this study to investigate the relationship between capital structure on banks profitability [CCA BANK] .  The method of data collection is primary data and questionnaire was chosen to sample the opinion of the respondent. In presenting the data we made use of tables which are being explain below. For this purpose, we studied and tested the effect of capital structure [debt and equity] on profitability from 2002 to 2012. Variables of return on assets [ROA] and return on equity [ROE] were used to measure CCA bank profitability. Results suggest that there is positive effect between debt ratio and profitability and a negative effect between equity ratio and bank profitability. This is to say that equity is negatively correlated to ROE and ROA is positively correlated to debt and equity. In addition, research results show that by increasing the debt and equity sources of finance, the bank’s profitability will increase hence better performance too. Also reducing the bank size, management can also increase the company’s profitability which can also increase shareholder’s wealth.

CHAPTER ONE

INTRODUCTION

1 .1 Background of study

This work investigates the effect of capital structure on banks profitability. More specifically, we test the impact on banks profitability following various theories introduced by different writers.

Capital structure is made up of two types, which are dept and equity financing. When a firm is financed solely by equity, it is called equity financing. When capital is raised solely by dept, It is termed dept financing. Capital can also be raised by a combination of both equity and debt, thus making the capital structure dept and. equity financing.

Also, the capital structure of a business can be raised from external sources or from plough back profits rather than distribute them to shareholders. (Brigham and ehrhardt,  2008). In reality, capital structure may be more complex, including different sources. The Modigliani-Miller theorem in (1958) forms the basis of further studies on capital structure. The theorem states that, in a perfect market, how a firm is financed is irrelevant to its value. But in a real world, capital structure is relevant, that is, a company’s value is affected by the capital structure it employs. Myers (1984) in his early studies says that different capital structure theories don’t seem to explain actual financing behaviours, and it seems presumptuous to advise firms on optimal capital structure. .

The capital structure of a business or bank can have an impact on the corporate performance of the business. Rami Zeiten and Gar GanyTian in their work say, capital Structure has a significant impact on corporate performance measures. It is said that short term debts to total asset level has significant positive effect market performance, and the Gulf crisis I 99O 1 99 1 “as found to have a positive impact on Jordanian corporate performance, while the outbreak of 1nfifada in the west bank and Gaza In September 2000 had a negative impact on corporate performance. When a capital structure influences a performance then it is reasonable to expect that the capital structure will affect the banks health and its likelihood of default. From a creditor’s point of view, it is possible that the debt to equity ratio aids in understanding banks risks management strategies and how banks determine the livelihood of default associated with financing distress firms.

In short, the issue regarding the capital structure and firm’s performance is important for both academics and practitioners.

Furthermore, capital structure cannot affect the value of financial institutions. This is a proposition contrast sharply with the intuitive notion that firms with risk free dept could borrow at an interest rate below the required return on equity, reducingits WACC of financing and increasing its value by substituting dept for equity butthe powerful arbitrage arguments employed demonstrates that market prices will compensate for any leverage decision by the firm.

When leverage is higher, so are the risks to shareholders increasing the cost of equity just enough so that the WACC of financing remains constant. In contrast, most other papers in this special issue take the view that the deviation from M&M frictionless world are important, so that financial institutions may be able to enhance their market value by taking up an optimal amount of leverage. Also,capital structure has an impact on banks performance, and this can be determined positive effect onby financial statement of the bank. Financial statement is the positive banking performance. There has been a debate that there is good between capital structure and banking performance. The main attraction capital structure and bank performance Is new technologies. By new technologies develop the productivity of any bank increase and shown good results Researchers debate on variables which use in the capital structure on banking performance such as investment and size of the bank, etc. so in the course of our investigation, werealize that different researchers have found positive impacts of capital Structure on banks performance. The different tools used to determine the capital structure of the bank is the study of Jensen and Meekling (1 976), in which they found different problems to measure the capital structure. Many papers effects on capital Structureand bank performance is positive.

1.2 Problem Statement

Although there are some problems faced by banks choosing its source of financing, it can be solved by choosing the optimal capital structure. The optimal capital structure can be determined by choosing the WACC is lower or choosing projects of the bank with highest stock price. Therefore, for banks to choose their optimal capital structure, (mix of equity and debt financing) management should be able to calculate their WACC of the project to choose that with the lowest cost of capital. For these banks in Cameroon to be able to determine the market of each source of capital, the bank should be able to determine the market value of debt and equity plus market value debt where the market value of each Source of finance is determined by present value of the return to investor, discounted at their required rate of return. Therefore, when a bank is financed by both equity (owner’s capital) and debt (loans gotten from other financial situations), it is termed a levered bank while a bank financed only by equity is termed unlevered bank. Banks observed that the subject of optimal capital structure has been focused on several studies. This is to say, the capital structure decision is critical for the continuous existence of any bank as to the maximization of return to stakeholders. However, literature revealed that several studies have been carried out to investigate the relationship that exist between capital structure and performance of previous studies have been conflicting. While some researchers reported positive relationship between capital structure and performance.

1.3 Objectives of the Study

1.3.1Main Objectives.

To examine the impact of capital structure on credit communautaire D’Afrique bank profitability.

1.3.2 Specific Objectives

1. To investigate the nature of the capital structure of Credit Communautaire D’Afrique bank.
2. To investigate the determinants of profitability of Credit Communautaire D’Afrique bank
3. What recommendations can we make from our findings?

1.4 Research Hypothesis

In this study, two hypotheses will be process based on the empirical evidence, that is;

Ho: Capital structure does not have a significant impact on CCA bank profitability.

H1: Capital has a significant impact CCA banks performance.