Title of reviewed article: - Factors Affecting the Financing Policy of Commercial Banks in

Ethiopia

Authors: - W/Michael S.; Jimma University, Business and Economics College, Jimma, Ethiopia,
Hamdu K. ; Corresponding Author. Jimma University, Business and Economics College,
Jimma, Ethiopia, Yonas M. ; Jimma University, Business and Economics College,
Jimma, Ethiopia

Source: - International Journal of Research in Business and Social Science IJRBS Vol.4, No, 2,
2015

Published by: - Umit Hacioglu 2015

ISSN: - 2147-4478

Article reviewed by Getnet Muhabaw

ID NO:- MPM/ 002/13

Room 14

1 | Accounting for Managers Assignment Article reviewed by: Getnet muhabaw

 1. Summary of the article

The overall purpose of the article is to clearly present the factors affecting the financing Policy of
Commercial Banks in Ethiopia. As per the article there are two specific objectives: the first is
examining the relationship between leverage and firm specific determinants of capital structure
decision. Secondly, the authors specifically wanted to analyze the theories of capital structure that can
explain the capital structure of banks in Ethiopia. The data sources used in order to fulfill the
objective of the article were mixed method research approach by combining documentary analysis
and in-depth interviews from the reference period of the twelve years (2000 - 2011) data for eight
banks in Ethiopia. The collected data were analyzed using both descriptive and inferential statistics.
The finding of the article shows that profitability, size, tangibility and liquidity of the banks are
important determinants of capital structure of banks in Ethiopia. But the growth and risk of bank have
no significant impact on the capital structure of banks in Ethiopia,

2. Theories discussed and supported theories in the article

The most three pervasive theories are discussed related to capital structure including pecking –order
theory, trade-off theory, and agency cost theory. Pecking order theory postulates that management
attempt to balance the benefits of interest tax shields against the present value of the possible costs of
financial distress. As implied trade-off theory firm’s optimal debt ratio is determined by a trade-off
between the bankruptcy cost and tax advantage of borrowing, holding the firm’s assets and
investment plans constant. Agency theory focused on the costs which are created due to conflicts of
interest between shareholders, managers and debt holders, and capital structures are determined by
agency costs, which includes the costs for both debt and equity issue. Based on the analysis from the
review literature both theories are not mutually exclusive. From a collective study on theories of
determinants of capital structure in Ethiopian banks, the researchers found little or week evidence to
that support static trade-off theory and the agency cost theory. However Pecking Order theory is
highly supported by the article because of the existence of many variables that can directly related
and determine capital structure of banks in Ethiopian.

3. Rejected theories

Modigliani and miller’s (1958) capital structure irrelevance theory were rejected. The theory argued
that capital structure is irrelevant to the value of a firm under perfect capital market conditions with

2 | Accounting for Managers Assignment Article reviewed by: Getnet muhabaw

no corporate tax and no bankruptcy cost and a firm’s value is only determined by its real asset, and it
cannot be changed by pure capital structure management. However the author disagree this theory by
the study of Amanuel (2010) determinants of capital structure of manufacturing share companies in
Addis Ababa, Ethiopia for the period over 2003-2010, using seven variables to examine the relevance
of theoretical internal (firm level) factors determine capital structure of manufacturing share
companies which are significant determinants of capital structure. .

4. Alignment of conclusions with the findings

The conclusion of the article is aligned with the finding. The result shows that profitability, liquidity,
tangibility, and bank size were important variables that influence banks’ capital structure and identify
pecking order theory is appropriate theory in Ethiopian.

5. Contribution of the article to the course

This article is directly related to our course. It contributes an additional knowledge no significant
determinant variables for capital structure to make appropriate policy decisions faced by financial
managers. The study also shows that there have been a few studies on determinants of capital
structure in Ethiopia, so that it initiate us for a further studies and it will be a stepping stone.

6. Strength and weakness of the article

Strength

This article is well articulated. It begins with clear objectives and used pertinent data collection as
well as analyzing methods with reliable and valid data from document and interview. Theories
discussion and their justification to use them relating to its objective is very well. By doing so I can
conclude that the article achieved its purpose.

Weakness

Despite the authors informed that there is little studies on determinants of capital structure, the
authors should have to call or invite its readers to conduct further studies on this field on their
conclusion.

3 | Accounting for Managers Assignment Article reviewed by: Getnet muhabaw