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CHAPTER V

FINDINGS AND CONCLUSION

Introduction

The central theme of the study is to examine capital structure and profitability in

srilankan banks. This has to be done very carefully, otherwise misleading conclusions

may be drawn and the whole purpose of doing research may get vitiated. It is only

through interpretation that the researcher can expose relations and processes that

underlie his findings. In case of hypotheses testing studies, if hypotheses are tested

and upheld several times, the researcher may arrive at generalizations. But in case the

researcher had no hypothesis to start with, he would try to explain his findings on the

basis of some theory. This may at times result in new questions, leading to further

researches.

Summary

Chapter 1 deals with background of the study, statement of problem, significance of

the study, research gap, objectives of the study and limitations of the study. The

relevant literature in the area related to the research topic and the theoretical and

empirical literature on the determinants of capital structure and profitability are

discussed in chapter 2. Geographical profile, Demographic profile, Organization of

profile, Data collection, Sampling design, Methodology, Hypotheses,

Conceptualization, Operationalization & Definition of key concepts & variables are

discussed under chapter 3. Chapter 4 deals with the computation of ratios and analysis

of data with the help of tables, charts, correlation and regression. Chapter 5 deals with

drawing inferences in order to arrive at generalized conclusions, summary of previous

chapters and recommendations.



Conclusions

Banks generally play a crucial role in the economic development of every country.

One critical decision banks face is the debt-equity choice. Among others, this choice

is necessary for the profit determination of firms. What this means is that banks that

are able to make their financing decision prudently would have a competitive

advantage in the industry and thus making superior profits. Nonetheless, it is essential

for us to recognize that this decision can only be wisely taken if banks know how debt

policy influences their profitability.

This study examined the relationship between capital structure and profitability in

srilankan banks. The study covered 10 listed banks over the period of 2002 to 2009

and the major findings of the study are summarized below:

Debt/equity mix and debt to total funds both were negatively correlated with the net

profit of banks for the period under study. Total debt was found to be significant in

determining net profit and return on capital employed in the banking industry of

Srilanka. The mean values of debt/equity ratio and debt to total funds were 825.15%

and 88.66% respectively. The mean value of debt/equity ratio suggests that debt is

8.25 times higher than equity capital. The debt/equity ratio is normally safe up to 2. It

shows the fact that banks in Srilanka depends more on debt (Long-term loans) rather

than equity capital. The mean value of debt to total funds ratio indicates 89% of the

total capital of listed banks in Srilanka is made up of debt. This has re-emphasized the

fact that banks are highly levered institutions.

A cautious attention has to be paid as far as the total debt is concerned. If the interest

bearing securities constitute a major part of the total debt banks have to spend much

of the money in the way of interests. This will lead to a decline in banks’ profitability

as it was clearly evidenced by the correlation value between debt to funds and net

profit (R = -.711*) and the regression value of .505, which is significant at 0.05 level.

Therefore, it can be concluded that total debt is the major determining factor of

profitability in the Banking Industry of Srilanka.



Long-term debt and total debt were found to be insignificant in determining return on

equity in the banking industry of Srilanka. This means that deposits do not necessarily

translate into enhancing returns on equity in the banking industry of Srilanka.

In the study, long-term debt is significant in determining the net interest margin and

also found to be a negative relationship between them. This is because of the fact that

banks in Srilanka use high levels of long-term debt contrary to the equity capital in

their operations. Further, total debt is significant and negatively related to net interest

margin in the study. Therefore it can be concluded that major part of the total debt of

Banking Industry in Srilanka is constituted by interest bearing securities. Findings

suggest that there is a negative relationship between capital structure and profitability

except between debt/equity ratio and return on equity but which was found to be

insignificant at 5%. Hence, hypothesis 2 is accepted. That is there is an indirect

(negative) relationship between capital structure and profitability.

The R 2 values were found to be significant for the impacts of debt to total funds on net

profit, debt/equity on net interest margin, and debt to total funds on interest margin.

But, no significant impacts were found on the remaining dependent variables. Totaldebt has a major impact on net interest margin and net profit accounted for 77.3%

and 50.5% respectively. The least amount of impact was found on return on equity

(R2 = 6%) by total debt. This reveals that remaining 94% is influenced by factors

other than total debt. That is other factors are probably a better predictor of return on

equity than total debt. The above findings suggest that there is an impact of capital

structure on profitability. But, no significant impacts were found on return on capital

employed as well as return on equity. Consequently, hypothesis 1 is accepted. That is

there is an impact of capital structure on profitability.



Recommendations

The following suggestions are recommended to increase the profitability of the

Banking Industry based on capital structure;

1) An appropriate mix of capital structure should be adopted in order to

increase the profitability of banks. Findings revealed that total debt is

contrary related to the profitability and almost contributed to 50.5% in

determining the net profit of the Banking Industry. That is in the case of

higher debt, profitability will tend to decline. The reason behind this may be

due to the high interest bearing securities engaged in the total debt. In

addition to these an increase in the level of debt also increases the riskiness

of banks. Therefore, banks should concern much on internal sources of

financing in order to increase their profitability.

2) A prerequisite to formulating effective banking policies to some extent

depends on the understanding of how capital structure influences the

profitability of banks. To add to the above, it is often the desire of top

management of every banking firm to make prudent financing decision in

order to remain profitable and competitive. A prerequisite to achieve thisalso to some extent, needs a sound knowledge of how capital structure

influences profitability of banks in Srilanka.

3) Banks in Srilanka must not be only interested in mobilizing deposits but

must also be concerned with utilizing these deposits effectively and

efficiently. To achieve this, banks must set competitive lending rates that

would not deter customers from accessing loans.

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