EFFECT OF CAPITAL STRUCTURE ON THE PROFITABILITY OF FINANCIAL INSTITUTIONS IN RWANDA A CASE STUDY OF BANK OF KIGALI PLC IN RUBAVU DISTRICT 2019-2023

Abstract

The study aimed at assessing the effect of capital structure on profitability of financial institutions in Rwanda by taking a case study of BK Plc in Rubavu and specifically to assess the level of profitability in BK PLC; to determine the relationship between equity financing and profitability of BK PLC and to investigate the relationship between debt financing and profitability of BK PLC. The study used correlational research design and also used quantitative method in data collection and analysis. The population size for this study was composed of 24 employees of BK Plc in Rubavu District including 6 employees from Gisenyi Town sub branch; 15 employees from Rubavu main Branch and 3 employees La Corniche Border sub-branch. Universal sampling technique was used to select respondents. Due to the fact that study population is small, the researcher used 24 respondents as sample size since they are few in number, therefore, the researcher can access to them easily. Primary data were gathered using questionnaires. Secondary data were collected using documentation review. Data gathered from the field were recorded and coded into (SPSS) software version 16.0 and they were analyzed using frequencies, mean and standard deviations. Multiple regression analysis was used to enable the researcher to establish the relationship between the variables under study. The study found out that the profitability of BK Plc was at satisfactory level as indicated by increased Return on Asset; Return on Equity and Net Profit Margin. In addition, the study revealed that there is a positive high relationship between equity financing and profitability of BK Plc which is equal to .894**and the sig. is .000 which is less than 0.01.Furthermore, the study indicated that there is a positive weak relationship between debt financing and profitability of Bank of Kigali PLC which is equal to .438**and the sig. is .000 which is less than 0.01. The study also found out the coefficient correlation R=0.916. This indicates that there is a positive strong relationship between capital structure and profitability of Bank of Kigali PLC. The coefficient of determination, adjusted R Square indicates the variation in the dependent variable (Profitability) due to changes in the independent variable. From the findings in the above table the value of adjusted R square was 0.876. This indicates that there was a variation of 87.6% in profitability of Bank of Kigali PLC due to changes in capital structure (equity financing and debt financing). The overall result shows that 87.6% of the variation in bank profitability is explained by capital structure (equity financing and debt financing). However, 12.4% of the variation in the profitability of this bank is explained by other factors which are not explained by this model. The study concluded that optimal capital structure in an important factor that influences the profitability of the bank. The study recommends that the management of Bank of Kigali Plc should take optimal capital structure decisions in order to boost profitability, bank value and maximize the wealth of shareholders.