relation between capital structure and jaiz bank … · 2019-02-18 · one is that of the unlevered...

Sahel Analyst: ISSN 1117-4668 Page 27

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

Sahel Analyst: Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri

Sahel Analyst: ISSN 1117-4668 8

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)

Relation between Capital Structure and Jaiz Bank Performance

Sahel Analyst: ISSN 1117- 4668 Page 29

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



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



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



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.



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



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



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.



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.



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.



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.



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



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



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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