Examining the Influence of Capital Structure on Firm Financial Performance: A Case Study of Financial Services Firms on the Lusaka Securities Exchange (LuSE)

This research investigated the impact of capital structure on the financial performance of selected financial services firms listed on the Lusaka Securities Exchange (LuSE) between 2019 and 2023. The analysis focused on five (5) companies: Standard Chartered Bank Plc (SCB), Zambia National Commercial Bank Plc (Zanaco), Madison Financial Services Plc (MFS), Zambia Reinsurance Plc (ZR) and Real Estate Investment Zambia Plc (REIZ). The Objective was to examine how Debt to Equity (D/E) as a Capital structure Variable influences Net Profit Margin (NPM) a performance indicator of firms within Zambia's financial sector. The study relied solely on quantitative financial data derived from audited financial statements and official LuSE disclosures. The key capital structure metric measured was the D/E, identified as the independent variable, and the performance indicator metric measured was NPM, identified as the dependent variable. Results reviewed that the banking institutions SCB & Zanaco maintained high average D/E ratios (1336% and 1203%, respectively) yet continued to post strong profit margins, reflecting efficient use of financial leverage. By contrast, MFS recorded negative equity and extreme D/E ratios exceeding -2000%, signaling deep financial instability. ZR adopted a conservative approach with a 29% D/E ratio, while REIZ saw fluctuating leverage, peaking at 79% in 2021 before stabilizing at 39% by 2023. The findings suggest that effective debt management supports sustained profitability in banking firms, while excessive leverage can endanger the financial viability of non-banking institutions. The research emphasizes the importance of maintaining optimal capital structures tailored to each firm's risk profile. Recommendations include adopting balanced financing strategies, reinforcing debt control mechanisms, and enhancing regulatory capital structure adequacy standards, particularly for non-banking financial entities. These insights aim to inform managerial decisions and regulatory frameworks in Zambia's financial landscape.