Academic journal article International Review of Management and Business Research

Capital Structure Impact on Banking Sector Performance in Pakistan

Academic journal article International Review of Management and Business Research

Capital Structure Impact on Banking Sector Performance in Pakistan

Article excerpt

Introduction

Firms who engage with business take deposit from surplus unit give loan to deficit unit and earn profit. (Atkin, 1921) . Different person describe bank is drive from word bancus means "bench. in start Jews doing business transaction in a bench . and some once describe bank word drive from German word back which means back after that it change with bank .it is said in I talian language " banco.

The history of banking start every interest point people has excess wealth they do not know how to use it .so, people need a person who protect their wealth from theft. Goldsmith was first person who take money and return when demanded it is first stage. In second stage goldsmith use medium of exchange and in third stage he proper start business and give interest for depositing (saab, 2012).

Banking in Pakistan

In Pakistan banking sectors face different challenges since 1947. Pakistan banking face limited resource, poor management, political instability, socio economic condition. After establishing state bank of Pakistan I July 1948 it takes control of banks and provides rules to improve position 1956. And encourage private sector to invest to make more financial institution to improve economy. In 1974 all commercial banks nationalize. But due to poor performance it again privatize in 1990. In Pakistan on June 2010, 36 commercial banks (25 private, 4 public and 7 foreign ) and 9087 branches allocated in Pakistan (Dr Asif Ali Shah, 2012).

In Pakistan banking company ordinance can be apply. This ordinance can be spread out all over the Pakistan or it come in Pakistan at force. The provisions of sections 6, 13, 25, 25A, 25AA, 29, 31, 3 2, 33, 40, 41, 41A, 41B, 41C, 41D, 42, 47, 48, 49, 51, 58, 83, 84 and 94 section of banking company ordinance describe the monetary and credit policy of state bank of Pakistan that impose on commercial bank. (banking company ordinace 1962).

Capital Struture

Financing is a most important element in any firm. It is backbone of any firm. So financing manager wants to make capital structures (debt, equity) that are best for firm. The capital structure is important for better performance. There are different types (100% equity, 100% debt, x% debt and y% debt). Capital structure is relationship between debt and equity. And it is most critical issue that effect on performance (Lawal Babatunde Akeem1, 2014).

Decisions on capital structure are depend upon cost of capital. Capital structures are depending upon major factors like economical, political and institution. Capital structure of an organization can be choices on risk, return and time period of return. Capital structure can also depend upon growth, size, profitability, tangibility, liquidity, interest rate. (myroshnichenko, 2004).

Profitability

Financing in capital structure is a most important they are directly related to profitability decision. Capital structure is combination of debt and equity. Debt is defining long term obligation while equity shows ownership. It is very important to taking decision in capital structure because it is directly related to profitability. In financial statement: balance sheet show all assets and liabilities but capital portion is very important. It is combination of common stock, prefer stock and long term obligation. With unplanned capital structure firm fail to operate business and fail to earn profit. Normally debt/equity ratio is 2/1. But it depends upon economic condition. (Niresh J. A., 2012).

Growth Rate

Research conducted on developing countries shows that capital structure directly effect on firm performance and economic growth rate. Capital structure fulfills the expectation of stockholder and creditor. Theory of capital structure shows that capital structure fulfills the need of stakeholder and help to economic growth. (Dr. Nwankwo, Effect of Capital Structure of Nigeria Firms on Economic Growth, 2014)

Interest Rate

Cost agency theory and Jensen and Meckling (1976) and the free-cash-flow theory proposed by Jensen (1986) define capital structure directly related to performance of an organization. …

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