Impacts of Capital Structure on Performance of Islamic and Conventional Banks: Evidence from Bangladesh.

International Journal of Research and Innovation in Social Science (IJRISS) | Volume VI, Issue I, January 2022 | ISSN 2454–6186

Impacts of Capital Structure on Performance of Islamic and Conventional Banks: Evidence from Bangladesh.

Anwar Zahid¹, Chinmoy Das Gupta², Retnoningrum Hidayah³, Ishaq Shariar⁴
¹ Lecturer, Independent University, Bangladesh
² Lecturer, Army Institute of Business Administration, Bangladesh
³ Lecturer, Universitas Negeri Semarang, Indonesia
⁴ Business Graduate, Independent University, Bangladesh

Abstract: Capital structure of the banking sector has a significant influence on performance measurement. Many studies have investigated the relationship between capital structure and the performance of banks but there is a relative shortage of empirical studies investigating the connection between capital structure and the performance of Islamic and conventional banks particularly from emerging economies. The main purpose of this research is to empirically study the capital structure and the performance of both Islamic and conventional banks in Bangladesh. Panel data of 24 banks (6 Islamic banks out of 8 and 18 conventional banks out of 41 banks) has been taken for the period of 2010 to 2017. Data has been analyzed by using EViews software. T-test has been used to determine the statistical evidence of the differential performance of both groups of bank. Outputs of T-test for the variables include; total debt ratio, short term debt, long term debt and loan to asset ratio indicate the existence of statistically strong significant difference between the capital structure of Islamic and conventional banks. In case of conventional banks, ROA as a performance measure is positively and significantly related to loan to asset and inflation variables. Similarly, evidence has been found that statistically, there is a strong positive association of loan to asset and strong negative connection of GDP on ROE. However, in case of Islamic bank, the outcomes reveal the existence of positive and significant impacts of loan to asset on ROA and ROE.

Keywords: Capital structure, Return on asset, Return on equity, Islamic and conventional bank, Bangladesh

1. Introduction
Capital structure refers to the distribution of finance, usually mixture of debt and equity capital. The decision on how firm will raise the fund for the business is subjected to both firm’s manager and fund supplier. Inappropriate combination of capital structure has negative impact on the performance of firm. Therefore, to maximize the firm value, the manger has to be careful to choose the blend of debt and equity Siddik et al. (2017). However, combination of capital structure differs from business to business. According to tradeoff theory, usually banks have higher financial leverage due to the nature of the business. The optimal capital structure of firm depends on tradeoff between tax saving advantage due to debt and bankruptcy cost. Usually, the higher the financial leverage the better the performance of banking sector (Chaarani, 2019). In contrast, the pecking order theory (Myers, 1977) suggests that performance level of a firm is not influenced by the capital structure rather each firm has their own favored hierarchy for financial decision. According to this theory, internal source of financing is more preferable when compared to external financing. Moreover, in case of external financing, debt is preferable when compared to equity finance.
In order to contribute to this argument, this research analyzes the influence of capital structure on the performance of both Islamic and conventional banks in Bangladesh. To do that, first, the study presents to ascertain whether there is a significant difference between the capital structure of Islamic and conventional banks. Second, this study analyzed the impact of capital structure on both group of banks performance by applying maximum sample of banks in Bangladesh.

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