INFLUENCE OF INTERNAL EQUITY FINANCING ON FINANCIAL PERFORMANCE OF COMMERCIAL BANKS IN RWANDA: THE CASE OF SELECTED COMMERCIAL BANKS

Abstract

This study investigates the influence of internal equity financing on the financial performance of selected commercial banks in Rwanda. It aims to analyze how funds generated from retained earnings and reinvestment impact key financial performance indicators, such as return on assets (ROA) and return on equity (ROE). As the Rwandan banking sector continues to expand amidst a growing economy, effective management of internal resources becomes essential for enhancing profitability and sustainability. The research emphasizes the importance of internal financing strategies in mitigating risks associated with external borrowing, thus fostering resilience against economic shocks. This study was guided by the following three theories; the static trade off theory, market timing theory and pecking order theory.  The study adopted a quantitative research design, specifically utilizing a correlational research approach to examine the influence of capital structure on the financial performance of commercial banks in Rwanda. The target population for this study consisted of all 11 commercial banks operating in Rwanda, as regulated by the National Bank of Rwanda (BNR). The study utilized secondary data collection methods, relying on publicly available financial statements and reports of commercial banks in Rwanda. Data was gathered from sources such as the National Bank of Rwanda (BNR), bank annual reports, and audited financial statements covering a period of several years to ensure comprehensive analysis. To ensure validity in this study, particular attention was given to the accuracy and appropriateness of the data collected from secondary sources. Reliability of the study was done through the use of consistent and standardized data collection procedures. To analyze the data, the study computed descriptive statistics (mean, median, standard deviation) for all variables to provide an overview of the dataset. Correlation analysis was performed to determine the strength of relationships between the independent and dependent variables, followed by the application of multiple regression to establish the influence of capital structure variables on financial performance. The coefficients presented in the model indicate the relationship between various forms of financing and financial performance, with retained earnings emerging as the most significant predictor. The constant term is 2.141, suggesting a baseline level of financial performance when all other variables are zero. Internal equity financing has a negative coefficient of -0.210, indicating that it negatively impacts financial performance, with a statistically significant t-value of -3.377 (p = 0.001), suggesting a strong correlation. The study concludes that internal equity financing, through profits, asset sales, and reduced capital expenditures, has a positive influence on the financial performance of selected commercial banks in Rwanda, significantly improving profitability and return on investment. It is recommended that commercial banks prioritize the reinvestment of retained earnings and efficient asset management to enhance their financial sustainability and mitigate the risks associated with external debt financing. Future research could explore the long-term impact of internal equity financing on the financial stability of banks in other sectors, while also investigating the role of macroeconomic factors, such as inflation and interest rates, on these financing strategies.