Impact of Capital Structure on Financing Decision and Financial Performance of an Islamic Bank: A Case Study of Al-Rajhi Bank

Banks play an important role in achieving economic development. This paper aims to investigate the main sources of funds for Al-Rajhi Bank, and to realize the relationship between financing decisions and capital structure, as well as the bank's performance. It analyzed the relationship among financing variables to indicate the direction of the effects of financing decision, performance, and leverage on dividend decision, investment decision, cost efficiency, credit risk, and capital risk. Three regression models were developed that took financing decision, capital structure, and performance as dependent variables. As a result, the biggest source of funding is Islamic financing of Mutajara and Murabaha, which significantly affected profitability regardless of other variables. There is insignificant relationship between if the bank financed its assets by shareholders' equity and financing decision, performance, dividend decision, investment decision, cost efficiency, and credit risk. While this greatly affected capital adequacy risk. The bank relies more on debt instead of shareholders' equity, which means insignificant dividend decision on financing and funding of the bank. Based on recommendations, this paper will be useful for the bank and regulators in the kingdom.