Determinants of capital structure and portfolio behavior of commercial banks in Tanzania

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University of Dar es Salaam
Commercial banks are important agents to economic growth and their contribution depends much on their capital base, capital allocation as well as their portfolio behavior. This study examined determinants of capital structure and portfolio behavior of commercial banks in Tanzania by using panel financial data of 14 banks from 1998 to 2010 on a quarterly basis. In order to examine determinants of the capital structure, the study applied multiple-indicators-multiple-causes structural equation modeling. In testing for portfolio behavior and measuring the impact of capital structure on portfolio holding of the banks, a profit maximization linear regression model was used. For all tested hypotheses, four models were considered, namely, a general model; bank size; ownership structure and structural break models. Results from the study indicated, in order of importance, that bank size, profitability, non-tax depreciation shield, growth and volatility are key determinants in capital structure decisions of commercial banks in Tanzania. Profitability is the only variable significant for bank size model. Growth is not significant in bank ownership model. Within banks’ effects and across time, results revealed that returns on loan funds and investment in government securities are important drivers for portfolio holdings of commercial banks for all four models. Returns on interbank loans and expenses paid for deposit holders behave differently based on bank size, ownership and structural break. Larger banks were found to have significant effect on interbank loans and returns to deposits in their portfolio holding while bank ownership had no significant impact. Leverage was found to be an important variable in portfolio holding within banks and across time based on the tested models. In explaining the impact of capital structure decision to portfolio behavior, bank size and ownership were significant while structural break was insignificant. The study results are consistent with trade off and pecking order theories of capital structure. The study contributes to understating of commercial banks’ capital structure and investment behavior in developing countries by considering size and ownership effects, variables which were not studied before. In due regard, there is need for close examination of commercial banks’ investment and profit margins as well as impose new regulations on foreign bank entry. Results from the study provide practical recommendations to consumers in understanding bank investment behavior and innovation in the banking sector and diversification of banks portfolio holdings including deposit mobilization.
Available in print form, East Africana Collection, Dr. Wilbert Chagula Library, Class Mark ( THS EAF HG1616.C34T34S9)
Banks and banking, Bank capital, Tanzania
Swai, T. A (2013) Determinants of capital structure and portfolio behavior of commercial banks in Tanzania, Doctoral dissertation, University of Dar es Salaam