Capital Adequacy and Banks Performance: Evidence from Deposit Money Banks in Nigeria
- August 25, 2019
- Posted by: RSIS
- Category: Social Science
International Journal of Research and Innovation in Social Science (IJRISS) | Volume III, Issue VIII, August 2019 | ISSN 2454–6186
Capital Adequacy and Banks Performance: Evidence from Deposit Money Banks in Nigeria
Ugwuka Nkechi, Ajuzie Oluchi
Department of Banking and Finance, Faculty of Management Sciences, Lagos State University, Nigeria
Abstract:-The paper examines the effect of capital adequacy on performance of deposit money banks in Nigeria. Banking sector is one of the most regulated sectors in any economy and the Nigeria Banking sector is not an exemption. This constant regulation is to minimize the bank failures and distresses. The study captures performance indicators and employed panel data made up of one hundred and eight observations comprising of nine cross-sectional units for period of twelve years. The collected data were estimated using Pooled regression effect estimation via Stata 2014 statistical package. Findings from the results showed a positive relationship between capital adequacy ratio (CAR) and return on assets (ROA). The study also found that there is a positive significant relationship between deposit to asset ratio and bank performance. The study concludes that capital adequacy improves performance of Nigeria deposit money banks. The paper recommends continuous monitoring of banks in line with capital adequacy for optimal performance.
Key words: Capital Adequacy, Banks Performance and Deposit Money Banks
I. INTRODUCTION
Capital is an essential requirement for the efficient and effective operation of any business enterprise including banks. The banking sector is critical due to the vital role it plays in the growth and development of an economy. Banks to a large extent, wield control over the supply of money in circulation and stimulate economic progress (Eyo & Amenawo 2015). Therefore, a strong banking sector is vital to facilitate the utilization of idle funds, promote growth, create jobs, generate wealth, eradicate poverty, entrepreneurial activity and increase in Gross Domestic Product (GDP).
The stability of banks therefore is of utmost importance to the regulatory body so as to strengthen the economy which will eventually aid the growth and development of a nation. To bring about this stability in the banking sector, the apex authority which is the Central Bank of Nigeria (CBN) continuously regulates the minimum paid-up capital of banking organizations. This is because deposits solicited from customers is different from paid up capital and as such is not as dependable as the bank’s capital requirement and so cannot be used for long term planning (Ikpefan 2013).
