Examining the Role of Capital Structure in Financial Performance in Kenyan Banks: Comparative Evidence from Equity Group, KCB Group, and Stanbic Kenya

This study examined the role of capital structure in financial performance among Kenyan banks, focusing on Equity Group, KCB Group, and Stanbic Kenya over the financial years 2021–2023. The study aimed to analyse the relationship between capital structure and profitability, assess its impact on financial stability, investigate the effects of agency costs on capital structure decisions, and develop strategic recommendations for optimal capital management. The research was grounded in the Modigliani-Miller Theory, Trade-Off Theory, Pecking Order Theory, and Agency Theory, which provided a theoretical framework for understanding capital structure decisions in the banking sector. A quantitative research design was adopted, utilising secondary financial data from audited financial statements and regulatory reports. Regression analysis was conducted using SPSS to establish the relationship between debt-to-equity ratios, Return on Equity (ROE), and Return on Assets (ROA). In contrast, ratio analysis facilitated a comparative assessment of financial performance trends. The findings revealed significant differences in capital structure strategies among the banks, with Equity Group maintaining the highest debt-to-equity ratio, followed by Stanbic Kenya and KCB Group. This aggressive leverage strategy enabled Equity Group to achieve superior financial performance, which is reflected in its higher ROE and ROA compared to the other banks. KCB Group demonstrated a balanced capital structure approach, maintaining steady profitability while mitigating financial risks. With a more conservative debt strategy, Stanbic Kenya prioritised financial stability at the expense of higher returns. The study further found that agency costs influenced capital structure decisions, as management’s risk preferences and shareholder interests shaped leverage policies. Macroeconomic factors, including inflation and interest rate fluctuations, also played a crucial role in determining capital structure trends. The study concluded that capital structure significantly impacted Kenyan banks’ profitability and financial stability. While higher leverage facilitated increased returns, it also introduced greater financial risk, necessitating a strategic balance. The findings underscored the need for banks to align capital structure decisions with institutional objectives and market conditions. The study recommended that Kenyan banks adopt a dynamic capital management approach, incorporating risk mitigation strategies while optimising profitability. Policymakers and regulatory bodies should refine capital adequacy regulations to accommodate evolving market conditions, ensuring financial stability without stifling growth. These insights contribute to the broader discourse on capital structure in emerging economies and offer practical implications for banking sector stakeholders.