CHAPTER ONE

INTRODUCTION

1.1      Background of the study

The theory of capital structure is an important reference theory in enterprise’s financing policy. The capital structure referred to Includes enterprise mixture of debt and equity financing. Whether or not an optimal capital structure is one of the most important and complex issues in the corporate finance. The banking sector in most economics is so critical that it attracts much attention from the domestic financial institutions, governmental regulatory authorities and international institutions. Most bank capital especially during start up come from combinations of various debt and equity proportion. This is gotten from shareholders to finance the company’s needs and balance their leverage which signifies a good standing of the bank. Debts can be acquired in the form of bonds and long term credit while equity can be acquired through the participation of stakeholders or common stocks and retained earnings. Following the seminar work of Modigliani and Miller (1958,1963) a substantial amount of effort has been put forward in corporate finance theory to determine the factors that influence a firm’s choice of capital structure. The important question facing banks in need of new finance is whether to raise debt or equity capital, the issue of finance has been identified as an immediate reason for business failing to start or to progress. It is imperative for Banks in Nigeria to be able to financetheir activities and grow over time. If they are to play an increasing and predominant role in creating value-added, providing employments well as income in terms of expanding the size of the directly productive sector in the economy. This helps in generating taxrevenue for the government and facilitating poverty reduction through fiscal transfers and income from employment and firm ownership. Hence, capital structure of a firm includes retained earnings, debt and equity. These components of capital structure referred to ownership shareholders and ownership by debt holders. This is   the pattern found in developing and developed countries (Laportal et,1999)

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