1.0 capital structure effects on the performance of banking

1.0             
Statement of the Problem

 

When
considering about the capital structure effects on the performance of banking sector,it
has some impacts on the performance. Therefore the capital structure of the
banking sectors has the influence on the performance of banking sector.

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Further,
in many countries, many investors or public don’t have the perfect knowledge
and understandings when dealing with the investment activities. Therefore, it
should be made clear understanding on the impact of capital structure on the
banking sector performance. The main problem of this
research is to study how the capital structure negatively or positively
influences on signaling the banking sector’s performance in Sri Lanka.

 

1.1             
Research Question

 

The
research question is what the research intends to answer, and how it will
expand the academic body of knowledge. For this study the research question is
to explore the relationship between capital structure and banking sector’s
financial performance. In this respect, the specific questions are presented
below:

·        
Does capital structure influence or is it influenced by
financial performances and value of the banking sectors?

·        
What is the
interrelationship between capital structure and performance?

 

1.2             
Objective
of the Study

 

In
this research, in line with the problem statement a few objectives are outlined
as the guiding principle to this study. The research objective is the answer to
a question, what will be the result of this research, or what can be learned
from this research? In order to answer the research questions, the objectives
are grated towards the following:

·        
To
identify the relationship between capital structure and financial performance
of banking sector in Srilanka

·        
To
evaluate the interrelationship between capital structure and performance.

·        
To
find out the impact of capital structure on profitability.

·        
To
determine the determinants of a capital structure.

1.3             
Significance of
the study

 

A cautious attention has to be paid as far
as the optimum capital structure is concerned. With unplanned capital
structure, banking sectors may fail to economize the use of their funds.
Consequently, it is being increasingly realized that a company should plan its
capital structure to maximize the use of funds and to be able to adapt more
easily to the changing conditions.

 

Theoretically, the financial manager
should plan an optimum capital structure for banking sectors. The optimum
capital structure is one that maximizes the market value of the firm. In
practice, the determination of an optimum capital structure is a formidable
task, and one has to go beyond the theory. There are significant variations
among industries and among banking sectors within an industry in terms of
capital structure. Since a number of factors influence the capital structure
decision of a banking sector, the judgment of a person making the capital
structure decision plays a crucial role. Two similar banking sectors may have
different capital structures if the decision-makers differ in their judgment of
the significance of various factors. A totally theoretical model perhaps can’t
adequately handle all those factors, which affect the capital structure
decision in practice. These factors are highly psychological, complex and
qualitative and do not always follow accepted theory, since capital markets are
not perfect and the decision has to be taken under imperfect knowledge and
risk.

 

The board of directors of the banking
sectors should develop an appropriate or target capital structure, which is
most advantageous to the bank. This can be done only when all those factors,
which are relevant to the banking sector’s capital structure decision, are
properly analyzed and balanced. The capital structure should be planned
generally keeping in view the interests of the equity shareholders and the
financial requirements of banking sectors. The equity shareholders, being the
owners of the banking sectors and the providers of risk capital, would be
concerned about the ways of banking sectors operations. However the interests
of other groups, such as employees, customers, creditors, society and
government, should also be given reasonable consideration.

 

In practice, for most banking sectors
within an industry there may be a range of an appropriate capital structure
within which there would not be great differences in the market value per
share. One way to get an idea of this range is to observe the capital structure
patterns of banking sector’s vis-à-vis their market prices of shares. It may be
found empirically that there are no significant differences in the share values
within a given range. The management of the banking sectors may fix its capital
structure near the top of this range in order to make maximum use of favorable
leverage, subject to other requirements such as flexibility, solvency, control
and norms set by the banking sectors.