Drivers of Banks’ Debt Financing: The Panel Data Evidence from Large Commercial Banks in Tanzania

Abstract

Debt financing is one of the major funding sources of commercial banks. In recent years, analysis of the banks’ debt financing has gained considerable interest in the context of the global financial crisis. Despite the importance of debt financing on banks, the determinants of debt financing in the banking sector have remained largely unexplored compared to non-banking firms. This led this paper to investigate the significant drivers of debt financing of commercial banks in Tanzania. To achieve the study objective a balanced panel was formed by extracting the data of Tanzanian all ten large commercial banks over the period of 10 years from 2013 to 2022. The study employed a fixed effect model along with a random effect model and ordinary least squares regression. The findings revealed that banks’ debt financing is positively and significantly influenced by bank size, bank liquidity, and economic growth. Profitability, collateral, and the COVID-19 pandemic negatively and significantly affect banks’ debt financing. The findings indicate that the drivers of debt financing of banks in Tanzania are similar to those of non-banks institutions however, distinctive in nature. The practical implications of this paper assist bank managers to identify the significant drivers influencing banks’ debt financing and opt for the best capital structure strategies. The regulators should ensure that low-cost capitals are accessible to banks during the financial crisis to maintain economic growth.