THE RELATIONSHIP BETWEEN DEBT TO EQUITY RATIO AND RETURN ON EQUITY OF COMMERCIAL BANKS IN KENYA
Kibirango, Moses M.
Ong’eta, Jackson Oyaro
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Despite regulations put in place by the Central Bank of Kenya, some banks still become bankrupt. As at 31 st December 2020, there were 43 commercial banks in Kenya, out of which two were in receivership while one was under statutory management and 11 were listed in Nairobi securities exchange (Central Bank of Kenya, 2020). The largest bank is Kenya Commercial Bank while the smallest is Spire bank having total assets of 758 billion, and 5 billion respectively (Central Bank of Kenya, 2020). This study sought to examine the relationship between debt to equity ratio and return on equity of commercial banks in Kenya. This research used secondary data from audited financial statements. The target population was all the 43 commercial banks in Kenya. Census of all the 43 commercial banks in Kenya was used for this study whereby data the period 2011-2020 was analyzed. The study revealed a p-value of 0.001 < 0.05 level of significance cut off point which was a strong evidence against null hypothesis (Ho), hence the null hypothesis was rejected. The regression analysis revealed that that 37.8% of variation in return on equity can be explained by debt to equity ratio while the remaining 62.2% is attributed to other factors outside the model. The study further revealed that debt to equity ratio has significant positive relationship with return on equity of commercial banks in Kenya. The study recommends that the central bank of Kenya should formulate and implement policies which ensures that all banks operate within a minimum level of debt to equity ratio.
- School of Business