Capital Adequacy and Return on Equity of Deposit Money Banks Quoted In Nigeria
Author(s)
Ogbebor, Peter I , Osho, Lukman A , Oguntodu, James A ,
Download Full PDF Pages: 111-120 | Views: 775 | Downloads: 207 | DOI: 10.5281/zenodo.3702238
Abstract
Financial performance in an organization demonstrates the proficient use of resources and the capacity to generate profit. This can be done through banks maintaining high return on capital and quality assets for better performance. In Nigeria, in spite of the fact that banks are highly regulated and that return on equity requirements have been in place since 1988, many banks have failed due to insufficiency of capital and mismanagement of funds. It is thus imperative to ascertain the effect of return on equity in the financial performance of quoted deposit money banks (DMBs) in Nigeria even when cognizance is taken of both critical microeconomic factors and macroeconomic variables.
This study adopted an ex-post facto research design. The target population for this research comprised 14 quoted deposit money banks in Nigeria which were in operation within the period of ten years that ranged from 2009 and 2018 from which secondary data was collected. The study employed ordinary least square regression analysis.
The findings of this research revealed the result showed that capital adequacy without control variables has a positive effect on financial performance using return on equity indicating that an additional increase in capital adequacy would cause return on equity to also increase by 0.165. However, it is significant since p< 0.05. The rho value showed that 3.9 % of variations in return on equity were caused by differences in the individual specific effects while the remaining 96.1 % are variables not in the model. The f statistics value of 5.669 is highly significant at the 5% significance level which showed that the overall model is statistically significant.
The study concluded that capital adequacy is a key factor affecting the financial performance using return on equity of the Nigeria deposit money banks and is essential in measuring financial performance of financial institutions. The study, therefore, recommended that the central bank of Nigeria should effectively regulate the capital and the resources owned by the deposit money banks (DMBs) in Nigeria.
Keywords
Capital adequacy, Assets quality, Bank size, Inflation, Financial performance
References
i. Aburime, T. (2008). Determinants of bank profitability: company-level evidence from Nigeria.Second Annual Conference, Department of Finance, University of Lagos, 1-6.
ii. Al Karim, R., & Alam, T. (2013). An evaluation of financial performance of private commercial banks in Bangladesh: Ratio analysis. Journal of Business Studies Quarterly, 5(2), 65- 68.
iii. Almazari, A. A., &Alamri, A. M.(2016). The effect of capital adequacy on profitability: a comparative study between samba and Saab banks of Saudi Arabia.Global Journal of Business Research, 8(4), 22-25.
iv. Athanasoglou, P., Delis, M., & Staikouras, C. (2006). Determinants of bank profitability in the South Eastern European region. Journal of international financial Markets, Institutions and Money, 2(2), 42-48.
v. Aymen, B. M. M. (2013). Impact of capital on financial performance of banks: the case of Tunisia. Banks and Bank Systems, 8(4), 47-54.
vi. Berger, A. N., & Bouwman, C. H. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics, 109(1), 146-176.
vii. Berger, A.(1995). The relationship between capital and earnings in banking, Journal of Money, Credit and Banking,27,432-456.
viii. Copeland, T.E., Koller, T. & Murrin, J. 1996. Valuation: measuring and managing the value of companies. 2nd Edition. New York: Wiley & Sons.
ix. Correia, C., Flynn, D., Uliana, E. & Wormald, M. 2003. Financial management. 5th Edition. Cape Town: Juta.
x. Cotter, R. V. (1966). Capital ratios and capital adequacy. National Banking Review, 3(3), 333-346.
xi. Dell'Ariccia, G., & Marquez, R. (2004). Information and bank credit allocation. Journal of Financial Economics, 72(1), 185-214.
xii. Ekundayo, O. U., & Odhigu, F. (2016). Determinants of human capital accounting in Nigeria. Journal of Accounting, 1, 5-7
xiii. Ezike, J. E., & Oke, M. O. (2013). Capital adequacy standards, basle accord and bank performance: the Nigerian experience (A case study of selected Banks in Nigeria). Asian Economic and Financial Review, 3(2), 146-149.
xiv. Finegan, P.T. 1991. ‘Maximising shareholder value at the private company’, Journal of Applied Corporate Finance, 4(1):30-45.
xv. Firer, C., Ross, S.A., Westerfield, R.W. & Jordan, B.D. 2004. Fundamentals of corporate finance. 3rd South African edition. New York: McGraw-Hill.
xvi. Flamini, V., Schumacher, M. L., & McDonald, M. C. A. (2009). The determinants of commercial bank profitability in Sub-Saharan Africa (No. 9-15). International Monetary Fund.
xvii. Gudmundsson, R., Ngoka-Kisinguh, K., & Odongo, M. T. (2013). The role of capital requirements on bank competition and stability: The case of the Kenyan banking industry. Kenya Bankers Association-KBA Centre for Research on Financial Markets and Policy Working Paper Series.
xviii. Gul, Sehrish, Irshad Faiza and Zaman Khalid (2011),” Factors Affecting Bank Profitability in Pakistan”, The Romanian Economic Journal, Year XIV, No.39, pp.61-84.
xix. Hashem, (2006), “Determinants of Egyptian Banking Sector Profitability: Time Series Analysis from 2004-2014”, International Journal of Business and Economics Sciences Applied Research, 9(2):73-78.
xx. Jaffe, J., Jeffrey, K.& Westerfield, R. (2004). Corporate finance (7th ed.).New York: Tata McGraw-Hill Education.
xxi. Lone, F. A., & Ahmad, S. (2017). Islamic finance: more expectations and less disappointment. .Journal of financial intermediation, 5(2), 174 -183.
xxii. McAleer, M. (2009). The Ten Commandments for optimizing value‐at‐risk and daily capital charges. Journal of Economic Surveys, 23(5), 831-849.
xxiii. Monteiro, A. (2006), “A Quick Guide to Financial Ratios,” The Citizen: Money web Business Insert, 6 May: 3.
xxiv. Nzotta, S. M. (2004). Money, banking and finance: Theory and practice (2nd ed.). Owerri: Hudson—Jude Nigeria Publishers.
xxv. Obadan, M. I. (2004). Foreign Capital Flows and External Debt: Perspectives on Nigeria and the LCDs Group (1st ed.).Lagos: Broadway Press.
xxvi. Onoh, J. K. (2002). Dynamics of money, banking and finance in Nigeria: an Emerging Market. Lagos: Astra Meridian.
xxvii. Ongore, V. O., & Kusa, G. B. (2013). Determinants of financial performance of commercial banks in Kenya. International journal of economics and financial issues, 3(1), 237-252.
xxviii. Petria, N., Capraru, B., & Ihnatov, I. (2015). Determinants of banks’ profitability: evidence from EU 27 banking systems. Procedia Economics and Finance, 20, 518-524.
xxix. Pringle, J. J. (1975). Bank capital and the performance of banks as financial intermediaries: Journal of Money, Credit and Banking, 7(4), 545-550.
xxx. Pyatt, Graham. "A measure of capital." The Review of Economic Studies 30, no. 3 (1963): 195-202.
xxxi. Rappaport, A. (1986), Creating Shareholder Value: A Guide for Managers and Investors. New York: The Free Press.
xxxii. Reimann, B.C. 1989. Managing for value: a guide to value based strategic management. Oxford: Basil Blackwell.
xxxiii. Rose‐Krasnor, L. (1997). The nature of social competence: A theoretical review. Social development, 6(1), 111-135.
xxxiv. Sufian, F., & Chong, R. R. (2008). Determinants of bank profitability in a developing economy: empirical evidence from the Philippines. Asian Academy of Management Journal of Accounting & Finance, 4(2), 546- 549.
xxxv. Sheefeni, J. P. S. (2015). The Macroeconomic Determinants of Profitability among Commercial Banks in Namibia. Journal of Emerging Issues in Economics, Finance and Banking, 4(1),1414-1431.
xxxvi. Stowe, J. D., Robinson, T. R., Pinto, J. E., and McLeavey, D. W. (2002), Analysis of Equity Investments: Valuation. Baltimore, MD: Association for Investment Management and Research (AIMR).
xxxvii. Tarawneh, M. (2006). A comparison of financial performance in the banking sector: Some evidence from Omani commercial banks. International Research Journal of Finance and Economics, 3(3), 101-112.
xxxviii. Thumbi, G. (2014). Effects of credit risk and working capital on capital adequacy for commercial banks in Kenya. (Unpublished MBA thesis). University of Nairobi.
xxxix. Van Horne, J. C., & Wachowicz, J. M. (2008). Fundamentals of financial management (2nd ed.). London: Pearson Education.
Cite this Article: