The effect of debt capital on financial performance of commercial banks in Bossaso, Somalia

This study examined the effect of debt capital on the financial performance of commercial banks in Bosaso, Somalia. A cross-sectional survey research design was adopted, targeting 247 employees from International Bank of Somalia, Premier Bank, and Salaam Bank. A sample of 152 respondents was selected using Slovene's formula, and data were collected through questionnaires and interviews. The content validity index (CVI) of 0.846 confirmed instrument validity, while a high response rate of 98.6 percent for questionnaires and 88.8 percent for interviews was achieved. Descriptive statistics, Pearson correlation, and regression analysis were employed to analyze the data. The findings revealed that debt capital management was moderate (mean = 3.36), with banks demonstrating strength in long-term debt acquisition (mean = 3.79) and collateral-based lending (mean = 3.51), while facing challenges in accessing central bank liquidity (mean = 3.00). Financial performance was rated fair overall (mean = 3.15), with operational scheme expansion rated good (mean = 3.66). The correlation analysis revealed a strong positive relationship between debt capital and financial performance (r = 0.619, p = 0.000), and regression analysis showed that debt capital explained 38.3 percent of the variance in financial performance (R² = 0.383) with a significant positive effect (B = 0.658, t = 9.284, p = 0.000). Consequently, the null hypothesis was rejected, confirming that debt capital has a statistically significant positive effect on financial performance. The findings validated both the Trade-Off Theory and the Modigliani and Miller (1958) theorem within Somalia's post-conflict banking context. The study recommended that bank managers enhance deposit mobilization strategies, regulators strengthen institutional frameworks for debt capital utilization, and policymakers address structural constraints limiting financial sector development.