ANALYSIS OF CAPITAL STRUCTURE: THE CASE OF WEGAGEN BANK SHARE COMPANY IN ADDIS ABABA

Abstract

The study assessed the role of capital structure and its impact on different activities of Wegagen Bank S. C. It generally intended to assess the role and to examine the impact of increasing reserve in National Bank of Ethiopia (NBE) on returns, customers’ willingness to deposit and liquidity problems. Capital structure is the way a firm finances its assets through some combination of debt, equity, or hybrid securities. The firm’s choice of how much debts it should have relative to equity is capital structure decision. Such a decision has many implications for the firm and is far from being settled issues either in theory or in practice. An appropriate capital structure is a critical decision for any business organization. Capital structuring may have multi-faceted roles and impacts in business firms like Wegagen Bank. These aspects of the structuring endeavours could contribute to both positive and negative roles as well as impact on the part of the firm under consideration. The study employed descriptive survey method using interviewing techniques and documentary analysis. It also used purposive sampling technique. Both interview guide and documentary analysis checklist were the tools used to collect both primary and secondary data. The study then employed both quantitative data analysis techniques (such as vertical analysis, horizontal analysis, and ratio analysis supported by univariate statistical techniques) and qualitative data analysis methods. The findings of the study show that the Bank is generally characterized by high degree of inflexibility, decreasing shareholders’ EPS and increased cost of capital, a combination of factors that has affected its efforts of securing the required amount of debt for financing its operations, being liquid enough to meet its debt obligations, and its liquidity state is considered to be unsatisfactory, albeit it has shown some sort of improvement since 2009, has been consuming more of its equity finance, fulfills both liquidity and reserve requirements imposed by the National Bank of Ethiopia, has also experienced a declining pattern of debt-equity ratio, and then the Bank’s capital structure is exercising high debt proportion. Therefore, Bank’s capital structure has been dominated by debt or has a mix of more of debt than equity. Thus, concerned officials of the Bank, the NBE, and policy makers at different levels in the country should consider this package of empirical findings and the conclusions reached while working on issues related to capital structure of such marketing and banking firms in various socio-economic contexts. It is also suggested that further studies on the creditors’ and the shareholders’ attitudes towards and perception of the existing capital structure of the Bank and/or other private and government owned firms using some of the influential theories of capital structuring both vertically and horizontally in Addis Ababa in particular and in Ethiopia in general.