Open AccessDOES CAPITAL ADEQUACY INFLUENCE THE FINANCIAL PERFORMANCE OF LISTED BANKS IN NIGERIA?
Author(s) -
Arekhandia Alfred Ukinamemen,
Hassan O. Ozekhome
Publication year - 2019
Publication title -
oradea journal of business and economics
Language(s) - English
Resource type - Journals
eISSN - 2501-3599
pISSN - 2501-1596
DOI - 10.47535/1991ojbe079
Subject(s) - capital adequacy ratio , capital requirement , financial system , business , financial intermediary , finance , basel iii , financial fragility , economics , return on assets , risk adjusted return on capital , financial institution , financial ratio , panel data , capital (architecture) , financial capital , financial crisis , capital formation , human capital , macroeconomics , incentive , profitability index , microeconomics , econometrics , economic growth , history , archaeology
Capital adequacy is important for the effective operation of any institution, particularly, its sustenance, viability and future growth. Banks as core financial institutions require sufficient capital base for its fund requirement and needs. Against this premise, banks and other financial institutions must keep balance between capital and available risk in its assets in order to reduce the likelihood of systemic crises, financial fragility and thus guarantee stability. This study empirically examines the impact of capital adequacy on the financial performance of banks in Nigeria. A sample of ten (10) listed banks on the basis of size and availability of data were examined over the period 2010 to 2017, using descriptive statistics, and multivariate panel data estimation technique, after conducting the Hausman, test of correlated random samples, wherein the fixed effect model was selected as the appropriate model. The empirical results revealed that banks’ capital adequacy ratio has a positive and significant impact on the financial performance of banks in Nigeria. Other variables found to be significant in the determination of the financial performance of banks in Nigeria are; bank size, bank loans and advances, debt ratio and growth rate of output. Against the backdrop of these findings, we recommend amongst others; sufficient capital base for banks, increased bank size through economies of scale measures, efficient deployment of bank resources, increased economic output (economic productive capacity) that will stimulate bank performance. These, will, in no doubt, reduce banks’ vulnerability to systemic crises and consequently enhance their stability for national growth through efficient financial intermediation.