Impact of Capital Structure on Performance of Commercial Bank in Sri Lanka

Abstract

The financial decision is an important strategic decision made by banks. It influences on stock holder's risk and return. Financial manager of the company should carefully decide the mix of capital in times for the efficient and effective operation of the business. An optimal capital structure leads to success of the banks. A bank's optimal capital structure refers to the particular combination of liabilities (debt, equity or any other) that maximizes the value of the banks an optimal capital structure. The identifying of the factors that affect the optimum level of debt and equity is very important for financial economist. The mix of capital structure varies from bank to bank. Objective of the study was to reveal the impact of capital structure on financial performance, to evaluate the interrelationship between capital structure and performance and to identify the determinants of a capital structure. Data was collected from secondary source as financial statement of commercial bank (2006-2010). The finding was that there is a positive relationship between the capital structure and bank's financial performance and Level of capital structure had significant impact on performance of commercial bank.