Determinants of banks profitability: Do capital structure and dividend policy matters?

In recent years, financial institutions, primarily commercial banks across Africa, have faced forceful mergers and acquisitions. These occurrences impede financial inclusion and reduce public confidence in the financial system as a whole. This study assessed the determinants of private banks' profitability with the mediating role of capital structure and dividend policy as the mediating variables using the PLS-SEM; the results showed that capital structure has a significant and positive mediating effect on the profitability contrary to bankruptcy cost and pecking order theory and in line with empirical evidence. It was also found that dividend policy has a significant mediating effect on the profitability of private commercial banks in Ethiopia. Furthermore, asset size, asset tangibility, and liquidity have significantly influenced capital structure, dividend policy, and profitability of private commercial banks in Ethiopia. Therefore, the study concludes that capital structure and dividend policy significantly affect the profitability of private commercial banks. Thus, the study recommends that banks should implement efficient capital structure and dividend policies to safeguard profitability and long-term survival. Specifically, banks should appraise investment projects as well as capital structure, ensuring the quality of the bank’s assets in the long term. Regarding dividend policy, banks should pay dividends to their shareholders because dividends are less risky than capital gains since they are more certain.