CHAPTER ONE

INTRODUCTION

1.1      Background of the study

The theory of capital structure is an important reference theory in enterprise’s financing policy. The capital structure referred to Includes enterprise mixture of debt and equity financing. Whether or not an optimal capital structure is one of the most important and complex issues in the corporate finance. The banking sector in most economics is so critical that it attracts much attention from the domestic financial institutions, governmental regulatory authorities and international institutions. Most bank capital especially during start up come from combinations of various debt and equity proportion. This is gotten from shareholders to finance the company’s needs and balance their leverage which signifies a good standing of the bank. Debts can be acquired in the form of bonds and long term credit while equity can be acquired through the participation of stakeholders or common stocks and retained earnings. Following the seminar work of Modigliani and Miller (1958,1963) a substantial amount of effort has been put forward in corporate finance theory to determine the factors that influence a firm’s choice of capital structure. The important question facing banks in need of new finance is whether to raise debt or equity capital, the issue of finance has been identified as an immediate reason for business failing to start or to progress. It is imperative for Banks in Nigeria to be able to financetheir activities and grow over time. If they are to play an increasing and predominant role in creating value-added, providing employments well as income in terms of expanding the size of the directly productive sector in the economy. This helps in generating taxrevenue for the government and facilitating poverty reduction through fiscal transfers and income from employment and firm ownership. Hence, capital structure of a firm includes retained earnings, debt and equity. These components of capital structure referred to ownership shareholders and ownership by debt holders. This is   the pattern found in developing and developed countries (Laportal et,1999)

1.2      STATEMENT OF THE PROBLEM

Every investment decision taken by the manager affects the performance of the banks. What percentage of the capital should be debt and what percentage should be equity so as to maximize profitability of the bank given that each source of finance has a cost-benefit attach to it, is a major managerial decision. The difficulties associated with designing an optimum capital structure policies to enhance profitability is the reason why this study sought to examine whether capital structure affect banks’ performance concentrating on five (5) selected banks, First Bank, Sterling  Bank, Guarantee Trust Bank, United Bank for Africa and Access Bank. The study, therefore, attempts to address the capital structure puzzle using data from the Nigerian quoted banks.
1.3    OBJECTIVES OF THE STUDY

The main objective of this study is to examine the relationship between capital structure and financial performance of Nigerian banks. Accordingly this study clusters around two specific

 objectives:                                                                                     

1.   To examine the effect of total debt ratio on the profitability of Nigerian banks.

2.   To examine the effect of equity on the profitability of Nigerian banks.

3.   To ascertain the relationship between capital structure and bank performance in Nigeria

1.4 RESEARCH HYPOTHESES

For the successful completion of the study, the following research hypotheses were formulated by the researcher; 

H0: there is no effect of total debt ratio on the profitability of Nigerian banks.

H1:there is effect of total debt ratio on the profitability of Nigerian banks.

H02: there is no relationship between capital structure and bank performance in Nigeria

H2: there is relationship between capital structure and bank performance in Nigeria

1.5 SIGNIFICANCE OF THE STUDY

This study is significant in many respects. Firstly, it seeks to add to the existing literature on the effect of capital structure on banks’ performance in the context of an emerging global market. 
Secondly, the study will be useful to managers who will use the findings of this research investigation as a guide in financial decision making. The study is expected to provide evidence that would serve as important quantitative information into the caldron of policies from an emerging economy.

1.6 SCOPE AND LIMITATION OF THE STUDY

This study focuses on the effect of capital structure on banks, performance. The study covers a period of five (5) years spanning from 2009 to 2013. This study is also restricted to banks listed on the Nigerian stock exchange (NSE) as at the end of December 2014 for availability of data and to enhance meaningful comparison. The researcher encounters some constrain which limited the scope of the study;

 a) AVAILABILITY OF RESEARCH MATERIAL: The research material available to the researcher is insufficient, thereby limiting the study 

b) TIME: The time frame allocated to the study does not enhance wider coverage as the researcher has to combine other academic activities and examinations with the study.

c) Organizational privacy: Limited Access to the selected auditing firm makes it difficult to get all the necessary and required information concerning the activities. 

1.7 DEFINITION OF TERMS

 CAPITAL STRUCTURE: The capital structure is 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.

PERFORMANCE: Performance is completion of a task with application of knowledge, skills and abilities. In work place, performance or job performance means good ranking with the hypothesized conception of requirements

BANKING INDUSTRY: The modern banking industry is a network of financial institutions licensed by the state to supply banking services. The principal services offered relate to storing

1.8 ORGANIZATION OF THE STUDY

This research work is organized in five chapters, for easy understanding, as follows

Chapter one is concern with the introduction, which consist of the (overview, of the study), historical background, statement of problem, objectives of the study, research hypotheses, significance of the study, scope and limitation of the study, definition of terms and historical background of the study. Chapter two highlights the theoretical framework on which the study is based, thus the review of related literature. Chapter three deals on the research design and methodology adopted in the study. Chapter four concentrate on the data collection and analysis and presentation of finding.  Chapter five gives summary, conclusion, and recommendations made of the study     

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