The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia

Desta Zelalem

doi:doi:10.11648/j.ijafrm.20200501.16

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The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia

Desta Zelalem

Published in International Journal of Accounting, Finance and Risk Management (Volume 5, Issue 1)

Received: 16 October 2019 Accepted: 24 December 2019 Published: 14 April 2020

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Abstract

The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).

Published in	International Journal of Accounting, Finance and Risk Management (Volume 5, Issue 1)
DOI	10.11648/j.ijafrm.20200501.16
Page(s)	62-68
Creative Commons	This is an Open Access article, distributed under the terms of the Creative Commons Attribution 4.0 International License (http://creativecommons.org/licenses/by/4.0/), which permits unrestricted use, distribution and reproduction in any medium or format, provided the original work is properly cited.
Copyright	Copyright © The Author(s), 2020. Published by Science Publishing Group

Keywords

Financial Leverage, Return on Assets, Return on Equity, Debt Ratio, Debt Equity Ratio (DER), Interest Coverage Ratio, Commercial Banks

References

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[3]	Zhang, H and Li, S 2008, 'The Impact of Capital Structure on Agency Costs: Evidence from UK Public Companies', in Cheng-Fee Lee (ed.) Proceedings of the 16th Annual Conference on Pacific Basin Finance, Economics, Accounting and Management, Brisbane, Australia, 2-4 July, 2008, pp. 1-18.
[4]	Enekwe, C. I., Agu C. I. &Eziedo K. N.(2014), The Effect of Financial Leverage on Financial Performance: Evidence of Quoted Pharmaceutical Companies in Nigeria, IOSR Journal of Economics and Finance, 5 (3).
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[6]	Georgeta, Vintilla and Florinita Duce (2012),”The Impact of Financial Leverage on Profitability Study of Compamies listed in Bucharest Stock Exchange”, ‘Ovidius’ University Annals, Economic Science Series, Vol 12 (1), pp 1741-44.
[7]	Peswani, Shilpa (2011), Does A Highly Leveraged Capital Structure Of A Firm Influence Its Performance? A Comparative Study of High and Low Leveraged FMCG Companies in India, Indian Journal of Finance, vol. 5.
[8]	Chandra kumaramangalam, S. &Govindasamy, P. (2010), Leverage- An Analysis and its Impact On Profitability With Reference to Selected Cement Companies in India” European Journal of Economics, Finance and Administrative Sciences, Issue 27, pp 53-65.
[9]	Camelia Burja1 (2011)” Factors Influencing the Company’s Profitability”, AnnalesUniversitatisApulensis Series Oeconomica, Vol-13 (2), PP 15-24.
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[14]	Njeri, M. M. K. &Kagiri, A. W. (2013), Effect of Capital Structure on Financial Performance of Banking Institutions Listed in Nairobi Securities Exchange, International Journal of Science and Research.
[15]	Abdul, A. & Adelabu, I. T. (2015), Impact of Financial Leverage on Firm Performance: Evaluation of Total Nigeria Plc, International Journal of Science Commerce and Humanities, 3 (6).
[16]	Abubakar A. (2015), Relationship between Financial Leverage and Financial Performance of Deposit Money Banks in Nigeria, International Journal of Economics, Commerce and Management, 3 (10).
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APA Style

Desta Zelalem. (2020). The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. International Journal of Accounting, Finance and Risk Management, 5(1), 62-68. https://doi.org/10.11648/j.ijafrm.20200501.16

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ACS Style

Desta Zelalem. The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. Int. J. Account. Finance Risk Manag. 2020, 5(1), 62-68. doi: 10.11648/j.ijafrm.20200501.16

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AMA Style

Desta Zelalem. The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. Int J Account Finance Risk Manag. 2020;5(1):62-68. doi: 10.11648/j.ijafrm.20200501.16

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@article{10.11648/j.ijafrm.20200501.16,
  author = {Desta Zelalem},
  title = {The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia},
  journal = {International Journal of Accounting, Finance and Risk Management},
  volume = {5},
  number = {1},
  pages = {62-68},
  doi = {10.11648/j.ijafrm.20200501.16},
  url = {https://doi.org/10.11648/j.ijafrm.20200501.16},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijafrm.20200501.16},
  abstract = {The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).},
 year = {2020}
}

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TY  - JOUR
T1  - The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia
AU  - Desta Zelalem
Y1  - 2020/04/14
PY  - 2020
N1  - https://doi.org/10.11648/j.ijafrm.20200501.16
DO  - 10.11648/j.ijafrm.20200501.16
T2  - International Journal of Accounting, Finance and Risk Management
JF  - International Journal of Accounting, Finance and Risk Management
JO  - International Journal of Accounting, Finance and Risk Management
SP  - 62
EP  - 68
PB  - Science Publishing Group
SN  - 2578-9376
UR  - https://doi.org/10.11648/j.ijafrm.20200501.16
AB  - The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).
VL  - 5
IS  - 1
ER  -

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Author Information

Desta Zelalem

Department of Accounting and Finance, Faculty of Business and Economics, Hawassa University, Hawassa City, Ethiopia

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APA Style

Desta Zelalem. (2020). The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. International Journal of Accounting, Finance and Risk Management, 5(1), 62-68. https://doi.org/10.11648/j.ijafrm.20200501.16

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ACS Style

Desta Zelalem. The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. Int. J. Account. Finance Risk Manag. 2020, 5(1), 62-68. doi: 10.11648/j.ijafrm.20200501.16

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AMA Style

Desta Zelalem. The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia. Int J Account Finance Risk Manag. 2020;5(1):62-68. doi: 10.11648/j.ijafrm.20200501.16

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@article{10.11648/j.ijafrm.20200501.16,
  author = {Desta Zelalem},
  title = {The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia},
  journal = {International Journal of Accounting, Finance and Risk Management},
  volume = {5},
  number = {1},
  pages = {62-68},
  doi = {10.11648/j.ijafrm.20200501.16},
  url = {https://doi.org/10.11648/j.ijafrm.20200501.16},
  eprint = {https://article.sciencepublishinggroup.com/pdf/10.11648.j.ijafrm.20200501.16},
  abstract = {The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).},
 year = {2020}
}

Copy | Download

TY  - JOUR
T1  - The Impact of Financial Leverage on the Performance of Commercial Banks: Evidence from Selected Commercial Banks in Ethiopia
AU  - Desta Zelalem
Y1  - 2020/04/14
PY  - 2020
N1  - https://doi.org/10.11648/j.ijafrm.20200501.16
DO  - 10.11648/j.ijafrm.20200501.16
T2  - International Journal of Accounting, Finance and Risk Management
JF  - International Journal of Accounting, Finance and Risk Management
JO  - International Journal of Accounting, Finance and Risk Management
SP  - 62
EP  - 68
PB  - Science Publishing Group
SN  - 2578-9376
UR  - https://doi.org/10.11648/j.ijafrm.20200501.16
AB  - The financing decision function of corporate finance deals with determining the best financing mix or capital structure of the firm in order to maximize the value of firm or wealth of owners. In Ethiopia, Commercial Banks use a combination of debt and equity source of finance in their capital structure. Each source of finance has its own cost of capital in the capital structure and hence effect on value of corporation. The ratio used to measure the proportion of debt to equity is considered as Financial Leverage. The main objective of this study is to investigate the effect of financial leverage on the financial performance of Ethiopian Commercial Banks for the period of 10 years (2008-2017) for the 5 selected commercial banks. As a measure of financial leverage for the independent variables three variables such as Debt ratio (DR), Debt Equity ratio (DER) and Interest coverage ratio (ICR) (times interest earned ratio) were used. As a measure of financial performance, the dependent variable two ratios such as return on asset (ROA) and return on equity (ROE) were used. The ex-post facto and longitudinal research design were used. The secondary data were collected from the audited financial reports (profit and loss statement and statement of financial position) of selected commercial banks operated in Ethiopian financial system. Descriptive statistics and Fixed Effect model were used. The result of the study showed that, Debt Ratio (DR) has a negative insignificant effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE) while Debt Equity Ratio (DER) And Interest Coverage Ratio (ICR) have significant positive Effect on Banks’ performance measured by Return on Assets (ROA) and Return on Equity (ROE).
VL  - 5
IS  - 1
ER  -

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