IMPACT OF MICRO-PRUDENTIAL INDICES ON CAPITAL ADEQUACY RATIO OF DEPOSIT MONEY BANKS IN NIGERIA

ABSTRACT

The study has been carried out with the intention to ascertain the effectiveness of various micro-prudential determinants of capital adequacy ratio in leading its behaviour and their relational impacting power on its measure for deposit money banks. This research study has employed panel data of selected twelve deposit money banks from 2005-2014 for the independent and dependent variables. The descriptive statistical analysis has been carried out to measure individual powers of each micro-prudential determinant of Capital Adequacy ratio. Thus, based on these discussions and analysis in the preceding chapters, the study concludes as follows: Generally three of the four independent variables of the study namely: deposits to assets ratio, return on assets ratio and assets quality ratio are significantly related to capital adequacy ratio, which is the only dependent variable of the study. A change in the combination of the four variables would result to about 60% change in capital adequacy ratio. Also, changes in loan portfolio as a result of increase or decrease in the quantum of loans grated to customers does not significantly impact capital adequacy ratio position. The capital adequacy ratio of Nigerian banks is well above the regulatory average of 8% in Basel II and 10.5% in Basel III. It is therefore not an exaggeration if from the average observed capital adequacy ratio of about 28% from the sample of the study, it is concluded that Nigerian deposit money banks are adequately capitalised both in terms of the quantity and quality of capital.

Background to the Study

Capital Adequacy Ratio (CAR) is one of the fundamental measures of the strength and wellness of banks the world over. The term is an important measure of ―safety and soundness‖ for banks and depository institutions because it serves as a buffer or cushion for absorbing losses (Abba, Peter, & Inyang, 2013). Capital Adequacy is the first letter ‗C‘, in the popular acronym ‗CAMELS‘ in banking parlance. The importance of the concept has drawn the attention of financial experts and policy makers both locally and internationally, especially Central Banks, Federal Reserves, Deposit money banks, Insurance Companies and the World Bank and has led to the popular Basel Accords. The Basel Capital Accord is an international standard for the calculation of capital adequacy ratios. The Accord recommends minimum capital adequacy ratios that banks should meet. Applying minimum capital adequacy ratios serves to promote the stability and efficiency of the financial system by reducing the likelihood of banks becoming insolvent. When a bank becomes insolvent, this may lead to loss of confidence in the financial system, causing financial problems for other banks and perhaps threatening the smooth functioning of financial markets. Lindgren, Garcia and Saal (1996) observed that since 1980, over 130 countries, comprising almost three fourths of the International Monetary Fund‘s member countries, have experienced significant banking sector problems, with 41 instances of crisis in 36 countries and 108 instances of significant problems. This situation posed serious concern for the policy makers and regulators. In the aftermath of the financial crisis, there have been efforts by regulatory authorities to make banks stronger. To accomplish this, governments across the developed and developing worlds are compelling banks to raise fresh capital and strengthen their balance sheets, and if banks cannot raise more capital, they are told to shrink the amount of risk assets (loans) on their books. In the case of Nigeria, the Central Bank of Nigeria, being the apex regulator of the banking industry increased the minimum capital base for commercial banks to twenty-five billion naira in 2005. This policy popularly referred to as the recapitalization or consolidation policy resulted in the reduction of Nigeria motley group of mainly anaemic eighty-nine banks to twenty-five bigger, stronger and more resilient financial institutions (Williams, 2011).

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