Issue

Abstract

This study examines how capital structure relates to the profitability of Nepalese commercial banks, distinguishing deposit financing from non-deposit interest-bearing debt. Using a panel of eight commercial banks over 2009/10 –2024/25, it estimates pooled OLS models with year fixed effects and bank fixed-effects models with Driscoll–Kraay standard errors. Profitability is measured by return on assets (ROA) and return on equity (ROE), and the estimation sample contains 126 bank-year observations. Deposit financing is negatively and significantly associated with ROA under both estimators. Its association with ROE is also negative and becomes significant at the 10% level in the fixed-effects model. Non-deposit interest-bearing debt has negative but statistically insignificant coefficients in all specifications. The non-performing loan ratio is negatively associated with ROE, whereas bank size is weakly and positively associated with ROA within banks. Asset growth shows no significant association with either profitability measure. The negative direction of the deposit-financing coefficient is consistent across both profitability measures and both estimators. These findings suggest that, in a deposit-dominated banking system, heavier reliance on deposits relative to equity coincides with lower asset returns. The study contributes by separating two components of bank debt that prior Nepalese research has usually combined. The study also demonstrates that the measurement of profitability at the asset or equity level influences conclusions about bank capital structure. Keywords: Capital Structure, Deposit Financing, Non-Deposit Debt, Bank Profitability, Panel Data, Driscoll–Kraay, Nepal.