ABSTRACT
There has been an argument on whether long term loans affect the capital structure of commercial banks in Nigeria. To contribute to this argument, the study investigated the effect of long term borrowing on the debt ratio and debt equity ratio of commercial banks in Nigeria. The ex-post facto research design was adopted for the study and data were collected from the annual report and financial statement of account of Access Bank Nigeria Plc and internet for the period of 2005 to 2016. Thus, debt ratio and debt- equity ratio served as proxies for capital ratio and they served as dependent variables. The study employed Ordinary Least Square regression method to analyze the date collected. The result of date revealed that long term borrowing has a positive and significant effect on debt ratio and debt- equity ratio. In conclusion, the study argued that long term loans have a significant effect on capital structure of commercial banks in Nigeria. (Represented by Access Bank Nigeria Plc). The study recommended that low interest long term loan should be pursued by the commercial banks in Nigeria in their capital structure policy.
TABLE OF CONTENTS
Title page i
Declaration ii
Certification iii
Dedication iv
Acknowledgement v
List of tables x
Abstract xi
CHAPTER ONE
INTRODUCTION
1.1 Background
of the Study 1
1.2 Statement of the Problem 3
1.3Objectives
of the Study 4
1.4 Research
Questions 4
1.5 Research
Hypotheses 5
1.6 Significance
of the Study 5
1.7 Scope
of the Study 5
1.8 Limitations
of the Study 6
1.9 Definition
of Terms 6
CHAPTER TWO
REVIEW OF RELATED LITERATURE AND THEORETICAL FRAMEWORK
2.1
Conceptual Framework 8
2.1.1
Concept of Capital Structure 8
2.1.2
Concept of Bank Loans 10
2.1.1.1 Principles, Processes and
Procedures of Granting Bank Loans 11
2.1.1.2 Overview of Commercial Banks’
Loans to Key Sectors in Nigeria 13
2.2
Theoretical Framework 15
2.2.1 Agency Theory 15
2.2.2 Pecking Order Theory 16
2.2.3 Trade-off Theory 16
2.3
Empirical Literature 17
CHAPTER THREE
RESEARCH METHODOLOGY
3.1 Research Design 28
3.2
Sources of Data 28
3.3 Area of the
Study
28
3.4 Model
Specification 29
3.5
Description of Variables 31
3.6 Techniques of Data Analysis 32
3.6.1 t-statistic 32
3.6.2 F-statistic 32
3.6.3 R-squared 32
3.6.4 Durbin-Watson
statistic 33
CHAPTER FOUR
DATA PRESENTATION, DATA
ANALYSIS AND DISCUSSION OF FINDINGS
4.1
Data Presentation 34
4.1.1 Debt Ratio 35
4.1.2 Debt-Equity Ratio (DER) 35
4.1.3 Long Term Borrowings (LTBR) 36
4.2 Data Analysis 37
4.3 Test of Hypotheses 41
4.4 Discussion of
Findings 42
CHAPTER FIVE
SUMMARY OF FINDINGS,
CONCLUSION AND RECOMMENDATIONS
5.1 Summary of Findings 44
5.2 Conclusion 44
5.3 Recommendations 45
REFERENCES
APPENDICES
LIST OF TABLES
Table
4.1: Data on Debt Ratio (DR),
Debt-Equity Ratio (DER) and Long term Borrowings (LTBR) of Access Bank Plc
Nigeria 34
Table4. 2: Ordinary Least Squares (OLS)
Result for DR = f (LTBR) 37
Table 4.3: Ordinary Least Squares (OLS)
Result for DER = f (LTBR) 39
CHAPTER
ONE
INTRODUCTION
1.1 Background
of the Study
All over the world businesses require
funds to carry out their operations. To get the required funds, many businesses
rely on loans from the banks (Rajan & Zingales, 2003). Thus, bank loans
represent a huge source of financing (funding) for businesses and
organizations. With this onerous responsibility placed on the shoulders of the
banks, they have been acknowledged as agents of financial intermediation. As
agents of financial intermediation, banks transmit monies mobilized from the
surplus sectors of the economy to the deficit sectors of the economy such that
the economy is improved. According to Surbhi (2015), loans have been defined as
a debt provided by financial institutions to their customers to fulfill working
capital requirements and usually payable at the agreed and specified time.
Therefore, bank loans could be said to be a catalyst for increased firm
productivity, increased investment, increased employment and even increased economic
growth. It becomes undisputable that bank loans do not only enhance the
performance of firms that obtains it but also help the overall economy of
nations (Obamuyi, Edun & Kayode, 2010).
However,
for banks to play the aforementioned intermediation role, the banks need to be
adequately capitalized. Banks like other firms have two major sources of
capitalization or financing, they are debt and equity (Abdullah & Kamal,
2015). This simply means that the banks also resort to either borrowing or
selling its shares in order to raise needed capital. The combination of debts
and equity mix of the bank describes its capital structure. In the views of Yadirichukwu and Okoli (2015),
capital structure of a firm refers to the mix of equity and debt adopted by a
firm in order to fulfill the needs of its various stakeholders. Because one
cannot give what one does not have, it then becomes imperative that for the
banks to lend to their customers, they must either resort to borrowing or
selling of their shares to finance the loan request of its customers. With this
knowledge, one can rightly say that a firm’s capital structure represents the
major claims to its assets (Aremu, Ekpo, Mustapha & Adedoyin, 2013). This
is against the backdrop that wrong capital structure decisions has the tendency
of pushing a firm to loss in the value derived from its assets while a right
capital structure decision will definitely lead to gain in the value derived
from its assets. Therefore, financial managers who are able to identify the
optimal capital structure to be adopted in their firms are rewarded by
minimizing the firm’s cost of finance which will lead to a maximization of the
firms’ revenue (Roy & Minfang, 2000).
In
Nigeria, the 2005 bank consolidation exercise brought to the fore the need for the
banks to have a healthy capital structure (Ugwunta, 2011). Although, on face
value, the consolidation exercise meant that the banks should have a minimum of
N25 billion as the capital base, it was
actually targeted towards achieving a sound capital structure for the banks (Adegbaju,
& Olokoyo, 2008; Ugwunta, 2011). A sound or healthy capital structure is
one that reflects low level of debt and corresponding high level of equity.
This indicates a positive sign of fitness. As the banks became fit and more
robust, it was expected that they could compete favourably with other banks
internationally. Of course, international competition is not restricted to
deposit mobilization alone but includes the ability of Nigerian banks to also
finance foreign loans (Soludo, 2004). Although, bank loans are seen as an
investment by the bank, yet it takes away from the bank’s stock of capital.
Thus, the higher the loans given out by the bank, the more its stock of capital
is depleted. Interestingly, the consolidation exercise was aimed at making the
banking sector in Nigeria immune to the adverse effect that may arise if the
banking sector were to grant more loans to customers (Soludo, 2007). One then
wonders whether the loans given out by the banking sector in Nigeria distort
its capital structure. The quest to resolve this puzzle necessitated this
study.
1.2 Statement of the Problem
A firm’s capital structure refers to
the mix of its financial liabilities. It has long been an important issue from
the strategic management standpoint since it linked with a firm’s ability to
meet the demands of various stakeholders (Roy and Minfang, 2000). Debt and
equity are the two major classes of liabilities, with debt holders and equity
holders representing the two types of investors in the firm. Each of these is
associated with different levels of risk, benefits, and control. While debt
holders exert lower control, they earn a fixed rate of return and protected by
contractual obligations with respect to their investment.
However, there is lack of consensus
among researchers of financial management about the optimal capital structure.
The variations in the various theories further make capital structure decisions
crucial. Thus, capital structure decision is very critical, particularly in relation
to performance of banks in terms of profitability and value of the equity.
Following the work of Modigliani and Miller (1958) much research has been
carried out in corporate finance to determine the influence of a bank’s choice
of capital structure on performance.
The difficulty facing banks in
Nigeria have to do more with the financing whether to raise debt or equity
capital. The issue of finance is so important that it has been identify as an
immediate reason for business failing to start in the first place or to
progress. From the foregoing, it is therefore important to understand how banks
financing choice affects their reporting quality. It is evidently clear that
both internal (firm specific) factors and external (macroeconomic) factors
could be very important in explaining the reporting quality of banks in an
economy. In Nigeria, investors and stakeholders appear not to look in detail
the effect of capital structure in measuring their banks reporting quality as
they may assume that attributions of capital structure are not relate to their
firms value. Indeed, a well attribution of capital structure will lead to the
success of banks. Hence, the issues of capital structure, which influence the
reporting quality of banks in Nigeria may have to be resolved.
In addition, the capital structure
choice of a firm can lead to bankruptcy and have an adverse effect on the
performance of the firm if not properly utilized. The research problem
therefore is to find an appropriate mix of debts and equity through which banks
can increase its financial reporting quality more efficiently and effectively.
Thus, the central point of this study is to access the long terms loans on the
capital structure of banks in Nigeria.
1.3
Objectives of the Study
The
main objective of the study is to investigate the effect of long term loans on
the capital structure of banks in Nigeria. The specific objects of the study
include the following:
(i)
To investigate the effect
of long term borrowings on debt ratio of Access Bank Plc.
(ii)
To investigate the effect
of long term borrowings on debt-equity ratio of Access Bank Plc.
1.4 Research
Questions
In
line with the specific objectives, the following questions were asked:
(i)
To what extent do long
term borrowings affect the debt ratio of Access Bank Plc?
(ii)
To what extent do long
term borrowings affect the debt-equity ratio of Access Bank Plc?
1.5 Research
Hypotheses
Two
hypotheses were tested in the study and they are in their null forms as:
(i)
H0: Long term
borrowings do not have significant effect on debt ratio of Access Bank Plc.
(ii)
H0: Long term
borrowings do not have significant effect on debt-equity ratio of Access Bank
Plc.
1.6 Significance
of the Study
(i)
Financial managers
The
study is relevant to financial managers within the banking sector in Nigeria as
it will enable them to develop appropriate capital structure threshold for
their banks within which they can efficiently manage the loans given out by
them.
(ii)
Academics
This
study will help other academicians, researchers and scholars in formulating
research questions and hypotheses that would guide their study. Literature
generated in the study will also help them develop appropriate literature
framework and theoretical framework for their study.
1.7 Scope
of the Study
The
study covers the period 2005 to 2017. The year 2005 is considered the base year
for the study in order to capture the post-consolidation era in the Nigerian
banking sector which was seen as the point when commercial banks in Nigeria
became stronger and more robust with the capability to offer loans demanded of
it. The year 2017 is considered the end year for the study to accommodate the
present realities as it concerns the bank’s (Access Bank Plc) operations in
Nigeria.
1.8 Limitations
of the Study
The researcher was
faced with some constraints which to a large extent limit the speedy completion
of the study. These constraints are time constraint and financial constraint.
(i)
Time constraint
Because of the
daily academic activities of the researcher especially as it has to do with
class attendance, it was highly strenuous to combine it with carrying out a
research of this magnitude. Often times, the time for the class work coincided
with the time required to carry out the research and this posed a huge
impediment to the progress of the work and delayed its completion at the
desired time.
(ii)
Financial constraint
Lack of funds to
vigorously pursue the work to its speedy completion within the set time frame
became a serious problem to the researcher. This is against the backdrop that
the researcher needed money to download materials and print the downloaded
materials. This places heavy debt burden on the researcher and at the same time
extended the time already set for the completion of the study.
1.9 Definition
of Terms
In
the context of the study, the following terms are defined. They include:
Capital Structure
This
refers to the choice of what source of funding (financing) a company should go
for. Three broad options abound namely equity financing alone, debt financing
alone and combination of equity and debt financing.
Total Debts
This
refers to the sum of all loans obtained by a company for its operations. It is
made up of both the short term debts and long term debts.
Total Assets
This
refers to the total tangible and intangible economic resource owned by a
company which has monetary value.
Total Equity
This
refers to the total amount of money generated by a company from shareholders equity
investment.
Bank Loans
These
are monies given out by the banks in Nigeria to their customers which are to be
paid back to the banks within the specified time. It carries interest rate
which is repayable to the creditor at the stipulated time.
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