The Effect of Financial Leverage on Commercial Banks’ Profitability in Tanzania

The purpose of the study was to investigate the relationship between the financial leverage and commercial bank’s profitability in Tanzania. It made use of secondary data from audited financial statements of listed commercial banks at Dar es Salaam Stock Exchange (DSE) since 2007 to 2013. Descriptive statistics was used as a tool to determine the bank’s profitability and debt statuses while the relationship between dependent variables measured by Return on Average Asset (ROA) and Return on Average Equity (ROE) with independent variable measured by Debt Ratio (DR) was determined by regression analysis. The study found that the commercial banks are firms with large debt averaging 89.9%, 87.7% and 80.2% for CRDB, NMB and DCB plc respectively. Furthermore the profitability measured in terms of ROA for CRDB, NMB and DCB are 3.7%, 5.1% and 3.7% respectively while that which is measured in terms of ROE are 25.4%, 29.6% and 14.5% respectively as mean values. It was also found out that change of debt amount in the capital structure has a negative effect on return on average asset explained by 33% and a non-effect on return on average equity