Examining the factors that affect the choice of sources of finance of local banks

Abstract

By contrasting factors that affect the banks’ capital structure, this study aimed to define and analyse Maltese banks' preferred sources of financing. Banks can make use of debt or equity funding to fund a project or daily operations. The official list of the Malta Stock Exchange (MSE) reveals that there are only five commercial banks that have publicly traded stocks and bonds. These banks were analysed and the factors that influence their choice of financing sources were investigated by trying to find their influence on capital structure. Multiple financial ratios were calculated using data gathered from these five banks’ financial statements. Three regression models where conducted on the ratios, model one taking the banks as the dummy variable, model two taking the year as the dummy variable, and model three analysing a pooled OLS data. The results indicated that banks who have a substantial part of their capital base made up of equity pay their investments in capital in order to reduce their capital level. Furthermore, banks that are very profitable have adequate capital to support their internal investments. Thus, these two instances indicate a low dependence on debt financing. Lastly, banks who have a high bankruptcy threat have to seek alternative sources other than debt, since it would be difficult for them to obtain this source.