Impact of Capital Structure on the Portfolio Behaviour of Commercial Banks in Tanzania

Abstract

This study examined the impact of bank capital structure measured by leverage ratio as defined in Based III based on tier 1 capital to total assets, on the portfolio behaviour of commercial banks in Tanzania by using fixed balance panel of annual financial statements data of 20 banks from 2002 to 2017. The studied banks had more than 89 percent of the total commercial banks’ assets in 2017 and 79 percent of total loans. Consideration of portfolio behaviour was explained based on choice assets (loans, investment in government securities and interbank loans) and non-choice items (non-earning assets including cash, required reserved and investment in fixed assets). The study examined the impact of capital structure on the bank portfolio holding with respect to the size of the bank and ownership. Findings revealed that only 35% of the banks are undercapitalized as at the end of 2017. The variables tested were significant at p <0.01 and p <0.001 except for the bank size measure. This means size of the bank is not a measure for its leverage structure, but with positive relationship.