The Impact of Capital Structure on Profitability of Banks in Malawi

Abstract

This study examines the impact of capital structure on bank profitability in Malawi. It examines the impact of debt equity ratio on profitability of banks. Using the Arellano and Bover General Method of Moments estimator, the study estimates a dynamic panel model. Evidence shows that debt has no impact on profitability measured by return on assets and has positive impacts on return on equity. Findings reject the existence of an optimal debt equity ratio in the Malawi banking sector. Banks should therefore focus on financing assets through debt than equity as it positively affects return on equity.