The impact of capital structure on the profitability of financial institutions listed on the Nigerian exchange group

Abstract

Capital structure remains a critical determinant of firm performance, particularly in the financial services sector where leverage decisions directly influence risk exposure, regulatory compliance, and shareholder value. Across global markets, financial institutions adopt varying capital configurations to balance profitability, liquidity, and solvency objectives. However, in emerging economies like Nigeria, structural challenges such as exchange rate volatility, inflationary pressures, and policy uncertainty amplify the complexities surrounding optimal capital structuring. This study investigates the impact of capital structure on the profitability of financial institutions listed on the Nigerian Exchange Group (NGX). It adopts a panel data methodology using secondary data from audited financial statements of selected commercial banks, insurance companies, and microfinance institutions over a ten-year period (2013–2022). Profitability indicators—Return on Assets (ROA), Return on Equity (ROE), and Net Profit Margin (NPM)—are examined in relation to leverage ratios, including total debt to equity, short-term debt to total capital, and long-term debt to total assets. Additionally, macroeconomic variables such as inflation and monetary policy rate are integrated to account for external financial shocks. The empirical results reveal a statistically significant, non-linear relationship: moderate leverage enhances profitability through tax shields and lower cost of capital, whereas excessive debt burdens diminish financial performance due to increased interest obligations and solvency risk. Firm-specific factors such as size, asset tangibility, and managerial efficiency also mediate this relationship. The findings offer valuable insights for financial managers, regulators, and investors on the importance of maintaining an optimal capital structure tailored to Nigeria’s evolving financial ecosystem.