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The study examined the effects of Capital structure on financial performance of listed commercial Banks in Kenya, a case study of Kenya Commercial Bank Limited. Most studies on capital structure were conducted in European countries, Middle-east and in the United States and found inconsistencies on the effects of capital structure on the financial performance of the firms. In Kenya studies done on capital structure and financial performance concentrated on the effect of capital structure on microfinance institutions, industrial firms and allied sectors. It is important to distinguish the banking sector from the general financial sectors and other sectors. Banks in general, operate under a totally unique and rigorous set of regulations which only apply to that sector making it impossible to explain the relationship of both the banking market and the rest of the market. The banking sector is fundamentally different from any other sector of the market in terms of high leverage and regulation, therefore the results obtained from Research using data across other sectors in the market need not to be carried over to the banking sector. Further, Research on the effect of capital structure and Kenyan Financial sector performance were very scarce. The banking industry being a key pillar in the financial industry and economy as a whole needed to be studied in this context. The inadequate studies and inconsistencies of effects of capital structure created a knowledge gap which motivated this study. The findings of this research study will help the Management of Kenyan Commercial Banks, investors, shareholders, scholars, Government of Kenya, Nairobi Stock Exchange and Capital Market Authority by providing insight on effect of capital structure on financial performance of listed commercial banks in Kenya. Capital structure theories; (irrelevance theory of capital structure, the Trade-off theory, the pecking order theory and the agency cost theory have been explored) and predict that leverage level influences a listed commercial banks' financial performance. This study has considered returns on assets and return on equity ratios as essential financial performance indicators. The effects of capital structure variables; deposits, debts, retained earnings and equity on financial performance of listed commercial banks in Kenya were therefore measured using these indicators. This study adopted descriptive research design. The study is a case study of Kenya commercial bank limited. Therefore the overall annual financial reports of 230 branches of Kenya Commercial Bank limited formed the target population. The main source of data for the study was Secondary data. The financial and income statements panel data covering five-year period from 2009 to 2013 was summarized and ratios calculated and analyzed using SPSS version 21 to produce inferential statistics using multiple regression analysis so as to determine the relationships between dependent and independent variables. The multiple regression models used considered performance as the dependent variable and was measured in terms of ROA and ROE. The results from the regression analysis indicated that Deposits, debt and equity was negative and significantly related to financial performance of listed commercial banks in Kenya as measured by return on assets. The regression analysis results indicated that the relationship between Retained Earnings ratio was positive although insignificantly related to financial performance as measured by return on assets. It was therefore was concluded that capital structure of listed commercial banks in Kenya is significant and affects financial performance of commercial banks negatively. Therefore various stakeholders in this industry should strive to carry out researches in other areas in order to be able to identify which are the major factors that affect the performance of their industry. Key Words: Capita Structure, Financial Performance, Commercial Banks
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