Determinants of Capital Adequacy of Nigerian Banks

Abstract

A reliable banking system in developing economies like Nigeria is vital for economic progress as it facilitates the flow of funds to productive investment sectors. The capital adequacy requirement of banks is a crucial feature of the stability of the banks globally. Because of its importance, we have examined the antecedents to capital adequacy. We have used the data set of ten leading banks of Nigeria from 2007 to 2017. Our results indicate that ROA and loan to total assets are significantly associated with capital adequacy. However, we found that nonperforming loans and size are negatively associated with the capital adequacy. Our results do not support the association between macroeconomics variables and capital adequacy. Therefore, we recommend that all banking entities should reserve sufficient cash and cash equivalents as a percentage of deposits and apply aggressive risk management practices to reduce the magnitude of nonperforming loans. This study was restricted to one country. Future studies can be carried out in other countries. A comparative data set of more than one country may bring further insight into the phenomenonKeywords: Capital adequacy ratio, banks-specific determinants, macroeconomic determinants, Nigeria.

Regulatory Capital is a Panacea for Efficiency, Credit Growth and Reducing Non-Performing Loans in Commercial Banks

“…An increase in capital adequacy ratio resulted in a decrease in NPL, which affirmed that CAR played a positive role in the reduction of business risks including non-performing loans. The results are in accordance with earlier research conducted by Abiodun et al (2020) and Yulianti et al (2018).…”

“…In this respect, Yulianti et al (2018) conducted a study on the relationship between capital adequacy ratio effect non-performing loans in public banks of Indonesia for the year 2012 to 2016 and found a positive impact of capital adequacy ratio on non-performing loans. Likewise, Abiodun et al (2020) carried out a study in Nigerian banks of ten leading banks from 2007 to 2017 and found that non-performing loans are negatively related to capital adequacy. Based on the results of Abiodun et al (2020) and Yulianti et al (2018), we suggested the following hypothesis: H3: There is a negative relationship between capital adequacy ratio and non-performing loans.…”

“…Likewise, Abiodun et al (2020) carried out a study in Nigerian banks of ten leading banks from 2007 to 2017 and found that non-performing loans are negatively related to capital adequacy. Based on the results of Abiodun et al (2020) and Yulianti et al (2018), we suggested the following hypothesis: H3: There is a negative relationship between capital adequacy ratio and non-performing loans.…”

Good Corporate Governance And Financial Performance On Capital Adequacy Ratio: A Reflection Of Indonesian Conventional Banking

“…These results correspond previous studies by Hadjixenophontos & Christodoulou-Volos (2018), Rianto &Salim (2020), andFatra et al (2020), which concluded that banks' return on assets has no effect on their capital adequacy ratio. These findings contradict those of Cahyono & Anggraeni (2015), Abiodun et al (2020), Hengkeng et al (2018), and Putri & Dana (2018, who concluded that Return on Assets had a positive and substantial effect on Capital Adequacy Ratio. Meanwhile, Dao & Nguyen (2020) concluded that Return on Assets had a considerable negative impact on the Capital Adequacy Ratio.…”

Efficiency, Profitability and Stability of Nepalese Commercial Banks

“…The provision of BASEL of CAR has played a major role to deduct the dominance of large banks that ensures the growth of the bank. Abiodun et al (2020) examined that the capital adequacy ratio had a significant strong positive relationship with the profitability of the bank. They also found that capital adequacy ratio has among the main predictors of mid-tier commercial banks' financial performance.…”