THE IMPACT OF CAPITAL ADEQUACY ON BANK PERFORMANCE: EVIDENCE FROM COMMERCIAL BANKS IN NIGERIA

ABSTRACT

This paper examines the impact of capital adequacy ratio on Nigeria’s commercial banks performance after the impact of the 2008-2009 Global Financial Crash using Ordinary Least Square Methods with two models. The first model proxy bank performance with return on assets while the second with return on equity. From the descriptive statistical analysis, the mean value of capital adequacy for the study period is 14.30%, which provides evidence that Nigerian commercial banks maintain higher level of capital requirement than prescribed by IMF’s Basel agreement of 8% and CBN’s 10%. The regression results indicate that even after the Global Financial Crash, capital adequacy ratio showed evidence of strong significance at 5% level in explaining bank performance proxy by return on asset ratio. However, the second model showed a weak correlation as all the determinants were insignificant at 5% levels but had their correct economic signs. Although the variables on asset quality and liquidity risk proxy by non-performing loans ratio and liquidity ratio variables respectively were not statistically significant in explaining Nigerian banks performance. Risk management institutions like the Asset Management Company of Nigeria (AMCON) has to do more in riding the sector of toxic debts.

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