Relation Between Capital Structure and Jaiz Bank Performance

Transcription

1. 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 viceversa. 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: ISSN 1117-4668 Page 27
2. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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) Sahel Analyst: ISSN 1117-4668 Page 28
3. Relation between Capital Structure and Jaiz Bank Performance 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, AlMutairi, 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 Sahel Analyst: ISSN 1117- 4668 Page 29
4. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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-toequity 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 Sahel Analyst: ISSN 1117-4668 Page 30
5. Relation between Capital Structure and Jaiz Bank Performance 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 Sahel Analyst: ISSN 1117- 4668 Page 31
6. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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. Sahel Analyst: ISSN 1117-4668 Page 32
7. Relation between Capital Structure and Jaiz Bank Performance 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 Sahel Analyst: ISSN 1117- 4668 Page 33
8. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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 Sahel Analyst: ISSN 1117-4668 Page 34
9. Relation between Capital Structure and Jaiz Bank Performance 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. Sahel Analyst: ISSN 1117- 4668 Page 35
10. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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. Sahel Analyst: ISSN 1117-4668 Page 36
11. Relation between Capital Structure and Jaiz Bank 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 coefficient 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. Sahel Analyst: ISSN 1117- 4668 Page 37
12. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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. Table 1: Descriptive Statistics GE SE Debt 2.25E+09 1.09E+10 2.53E+10 Mean 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 Source: Authors Calculation using Eviews Version 7.0. 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. Sahel Analyst: ISSN 1117-4668 Page 38
13. Relation between Capital Structure and Jaiz Bank Performance 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. Table 2: Correlation Matrix Variables GE SE Debt 1.000 0.874 0.942 GE SE 1.000 0.986 Debt 1.000 Source : Authors Calculation using Eviews Version 7.0. 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. Table 3: Empirical Results Variable Coefficient Std. Error C SE Debt 2 R 2 Adj.R AIC SBC t-Statistic Prob. 7.390E+10 4.760E+09 1.554E+01 0.0409 -7.467E+00 4.744E-01 -1.574E+01 0.0404 3.902E-01 1.708E-02 2.285E+01 0.0278 0.9995 38.3026 Hannan-Quinn criter. 0.9986 39.3126 38.8523 Durbin-Watson stat F-statistic Prob(F-statistic) 3.1948 1104.3030 0.0213 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 Sahel Analyst: ISSN 1117- 4668 Page 39
14. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri 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 Sahel Analyst: ISSN 1117-4668 Page 40
15. Relation between Capital Structure and Jaiz Bank Performance 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. References Abor, J. (2005). The Effect of Capital Structure on Profitability: Empirical Analysis of Listed Firms in Ghana, Journal of Risk Finance, 6(5):438 Adesina, J. B., Nwidobie, B. M. & Adesina, O. O. (2015). Capital structure and Financial Performance in Nigeria International Journal of Business and Social Research, 5(2), 21-31. Aggarwal, R. K. & Yousef, T. (2000). Islamic Banks and Investment Financing, Journal of Money, Credit and Banking 32, 93-120. Sahel Analyst: ISSN 1117- 4668 Page 41
16. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri Ajayi, S.A. (2007). Financial Management: Concepts, Fiancial System and Business Frame. Third Edition Ibadan, University Press, Ibadan, Nigeria. Akeem L.B., Edwin T. K., Monica W Kiyanjui3 & Adisa M. K.(2014). Effects of Capital Structure on Firm’s Performance: Empirical Study of anufacturing Companies in Nigeria, Journal of Finance and Investment Analysis, 3(4), 39-57 Amidu, M. (2009). Determinants of Capital Structure of Banks in Ghana: An Empirical Approach. Baltic Journal of Management, 2(1), 67-69 Awunyo-Vitor , D & Badu, J. (2012). Capital Structure and Performance of Listed Banks in Ghana, Global Journal of Human Social Science, 12(5), 56-62. Ayub, M. (2007) Understanding Islamic Finance. England: John Wiley & Sons, Ltd. Dare, F., & Sola, O. (2010). Capital Structure and Corporate Performance in Nigeria Industry: Panel Data Analysis, Journal of Mathematics and Statistics Derigs, U. & S. Marbazan (2008) Review and Analysis of Current Sharia’h Compliant Equity Screening Practices, International Journal of Islamic and Middle Eastern Finance and Management 1(4):285303) Donaldson, G. (1961). Corporate Debt Capacity, Boston, Division of Research, Graduate School of Business Administration, Harvard University. Retrieved via Google Scholar Ebiad, I. E. (2009). The Impact of Capital Structure Choice on Firms Performance: Empirical Evidence from Egypt, Journal of Risk Finance, 10(5), 477-487. DOI:10.1108/15265940011001385. Fauzi F, Locke S, Basyith A, Idris M (2015). The Impact of Islamic Debt on Company Value. In H A El-Karanshawy Et Al. (Eds.), Islamic Banking and Finance – Essays on Corporate Finance, Efficiency and Product Development. Doha, Qatar: Bloomsbury Qatar Foundation. Gatsi J. G. & Gadzo S. G. (2013). Global Journal of Finance & Management, Vol. 5(2),79-86 Harris, M. & Raviv, A. (1991). The Theory of Capital Structure. Journal of Finance, 46,297-355. Sahel Analyst: ISSN 1117-4668 Page 42
17. Relation between Capital Structure and Jaiz Bank Performance Idode , P. E., Adeleke, T. M., Ogunlowore, A. J.& Ashogbon, O. S. (2014). Influence of Capital Structure on Profitability: Empirical Evidence from Listed Nigerian Banks. IOSR Journal of Business and Management, 16(11), 22-28. Kochar, R. (1997). Explaining Firm Capital Structure: The Role of Agency Theory vs Transaction Cost Economics. Strategic Management Journal, 17, 713-728. Krishnan, V.S. & Moyer, R.C (1997). Performance, Capital Structure and Home Country: An Analysis of Asian Corporations. Global Finance Journal, 8, 129-143. Mahmood, R. (2009). Islamic Governance, Capital Structure, and Equity Finance: Examining the Possibilities of American Financial Shari’ah Boaards(2009). Cornell Law Faculty Papers. Paper 50. Retrieved from http://scholarship.low.cornell.edu/closps-paper/50, May 11, 2018. Menk, W. (2004).Using an Optimal Capital Structure in Business Valuation, KonzinValuationPartners.Retrievedfromhttps://www.kotzinvaluation.com/a rticles/optimal-capital-structure, May Milhem, M. M.(2017) Banks Performance and Capital Structure: Comparative Study between Islamic Banks and Conventional Banks, International Research Journal of Finance and Economics ISSN 1450-2887 Issue 160 http://www.internationalresearchjournaloffinanceandeconomics.com Modigliani, F. & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261-297. Modigliani, F. & Miller, M. H. (1963). Corporate Income Taxes and the Cost of Capital: A Correction. The American Economic Review, 53, 433-443. Naser, K., Al-Mutairi, A., Al Kandari, A & Nuseibeh, R. (2015). Cogency of Capital Structure Theories to an Islamic Country: Empirical Evidence from the Kuwaiti Banks International Journal of Economics and Financial Issues, 5(4), 979-988. Pratomo, W. A & Abdul Ghafar Ismail, A. G. (2007) Islamic Bank Performance and Capital Structure. Online at http://mpra.ub.uni-muenchen.de/6012/ MPRA Paper No. 6012, posted 29. November 2007 13:38 UTC Sahel Analyst: ISSN 1117- 4668 Page 43
18. Sahel Analyst : Journal of Management Sciences (Vol.16, No.5 2018), University of Maiduguri Rajha, K.S.& Alslehat, Z. A.(2014). The Effect of Capital Structure on the Performance of Islamic Banks, Interdisciplinary Journal of Contemporary Research in Business, 5(9)144-161. Riahi-Belkaonui, A. (1999) Capital Structure: Determination, Evaluation and Accounting, Westport, Quorum Books Publisher. Sagara, S. (2015). The Analysis of Capital Structure on Financial Performance Using Capital, Asset, Earning, And Liquidity Ratio In Islamic Banks Listed On The Indonisia Stock Exchange (IDX) IN 2014, International Journal of Business, Economics and Law, 8(1), 53-60 Shaba, Y., Yaaba, B. N. & Abubakar, I. (2016). Capital Structure and Profitability of Deposit Money Banks: Empirical Evidence from Nigeria. European Journal of Management and Business. 8(23), 110-121. Al-Deehani, T., Rifaat A. A., and V. Murinde, (1999). The Capital Structure of Islamic Banks under Contractual Obligation of Profit Sharing, International Journal of Theoretical and Applied Finance. Thabet O. B. & Henefar, M. M. (2014). Capital Structure In Islamic Capital Markets: Evidences From Bursa Malaysia, Proceedings of the Australian Academy of Business and Social Sciences Conference 2014 (in partnership with The Journal of Developing Areas) ISBN 978-0-9925622-0-5 Yahaya, O. A. & Yahaya, L. (2015).Empirical Examination of The Financial Performance of Islamic Banking in Nigeria: A Case Study Approach, International Journal of Accounting Research, 2( 7),1-13. Zeitun, R & Tian, G.G (2007). Capital Structure and Corporate Performance: Evidence from Jordan. Australasian Accounting, Business & Finance Journal, 1(14), 40-61. Sahel Analyst: ISSN 1117-4668 Page 44