The Impact of Capital Adequacy on Bank Performance: Evidence From Commercial Banks in Nigeria
CHAPTER ONE
OBJECTIVE OF THE STUDY
The objectives of the study are;
- To ascertain the relationship between risk management and capital adequacy in bank performance
- To ascertain the relationship between bank financial stability and capital adequacy on bank performance
- To ascertain the impact of capital adequacy on bank performance
CHAPTER TWO
REVIEW OF RELATED LITERATURE
The Concept of Capital Adequacy
The concept of capital adequacy is a result of the idea of rearranging banks’ existing capital structures in order to restructure the banking industry against widespread distress. Adequate capital creates an opportunity for better standards in any business establishment. It spurs business exertion and a better performance. According to Olalekan and Adeyinka (2013), the minimum ratio of capital to total risk-weighted assets should remain at 10 per cent as prescribed in circular BSD/11/2003 issued on 4 August 2003. Further, at least 50 per cent of a bank’s capital should comprise of paid-up capital and reserves, while every bank should maintain a ratio of not less than 1:10 between its adjusted capital funds and total credit net of provisions. Consequently, deposit money banks in Nigeria are encouraged to maintain a higher level of capital which is commensurate with their risk profiles. The existing definition of the constituents of capital, deductions from total qualifying capital and restrictions within and between primary (Tier 1) and supplementary (Tier 2) capital are generally consistent with the Basel Accord. Tier 2 capital is limited to 100 per cent of Tier 1 capital. The general provision was part of Tier 2 capital where a bank’s specific provision for bad and doubtful debts was made to CBN’s satisfaction. However, such a general provision was restricted to a maximum of 1.25 per cent of the risk weighted assets. Deferred tax assets are considered as intangible assets for capital adequacy purposes and should be deducted from total capital and reserves in arriving at total Tier 1 capital.
CHAPTER THREE
RESEARCH METHODOLOGY
Research design
The researcher used descriptive research survey design in building up this project work the choice of this research design was considered appropriate because of its advantages of identifying attributes of a large population from a group of individuals. The design was suitable for the study as the study The Impact of Capital Adequacy On Bank Performance: Evidence From Commercial Banks In Nigeria
Sources of data collection
Data were collected from two main sources namely:
(i)Primary source and
(ii)Secondary source
Primary source:
These are materials of statistical investigation which were collected by the research for a particular purpose. They can be obtained through a survey, observation questionnaire or as experiment; the researcher has adopted the questionnaire method for this study.
Secondary source:
These are data from textbook Journal handset etc. they arise as byproducts of the same other purposes. Example administration, various other unpublished works and write ups were also used.
CHAPTER FOUR
PRESENTATION ANALYSIS INTERPRETATION OF DATA
Introduction
Efforts will be made at this stage to present, analyze and interpret the data collected during the field survey. This presentation will be based on the responses from the completed questionnaires. The result of this exercise will be summarized in tabular forms for easy references and analysis. It will also show answers to questions relating to the research questions for this research study. The researcher employed simple percentage in the analysis.
CHAPTER FIVE
SUMMARY, CONCLUSION AND RECOMMENDATION
Introduction
It is important to ascertain that the objective of this study was to ascertain the Impact of Capital Adequacy On Bank Performance: Evidence from Commercial Banks in Nigeria
In the preceding chapter, the relevant data collected for this study were presented, critically analyzed and appropriate interpretation given. In this chapter, certain recommendations made which in the opinion of the researcher will be of benefits in addressing the challenge of Capital Adequacy On Bank Performance: Evidence from Commercial Banks in Nigeria
Summary
This study was on The Impact of Capital Adequacy On Bank Performance: Evidence from Commercial Banks in Nigeria. Three objectives were raised which included: To ascertain the relationship between risk management and capital adequacy in bank performance, to ascertain the relationship between bank financial stability and capital adequacy on bank performance and to ascertain the impact of capital adequacy on bank performance. The total population for the study is 200 staff of CBN Uyo, Akwa ibom state. The researcher used questionnaires as the instrument for the data collection. Descriptive Survey research design was adopted for this study. A total of 133 respondents made up HRM, accountants, senior staff and junior staff were used for the study. The data collected were presented in tables and analyzed using simple percentages and frequencies
Conclusion
The banks reported profits over the years under review despite the Nigerian economy being in recession since 2011.The size of the banks significantly influenced their performance internationally. The growth of the banks was largely due to their having more than 6 per cent risk-weighted assets in reserves to meet any unforeseen economic uncertainties in accordance with Basel Accord III. During the study period all the banks were far more stable and diversified than domestic banks in Nigeria. This is informed by the large deposits and high customer confidence. There existed a positive and significant correlation between profit after tax and loans and advances. By implication, therefore, banks with foreign operations had higher customer deposits and thus extended more loans and earned more profits than their domestic counterparts. There was a need to maintain adequate cash to provide for losses arising in case of customer defaults for maintaining good credit ratings and as required by the supervisory agencies of all international banks conducted within the ambit of the Fitch triple credit rating standards. Loans and advances, total assets, total equity and customers’ deposits had a positive impact on banks’ profitability but bank size had a more significant effect on performance
Recommendation
Empirically, the results indicate a positive impact of capital adequacy on a bank’s profitability. This is in line with theoretical expectations and also in line with the findings of other authors. However, some authors believe that this could lead banks to trading over-cautiously in order to at least prevent sanctions from supervisory agencies. This was likely the case of ECO Bank, which advanced lower loans in proportion to its size. Thus, the Central Bank of Nigeria and other agencies should critically look at the provisions of the prudential guidelines.
- The results show that a bank’s size has more of an impact on its profitability. But Pasiouras and Kosmidou (2007) maintain that the performance of domestic and foreign commercial banks is affected by bank specific characteristics. Hence, the Basel Accord needs to consider not only a bank’s internal characteristics but also the economic climate in which it operates when amending the Basel III Accord.
- Based on the analyses and findings in this study, it is suggested that the regulatory bodies (CBN and NDIC) should not rely solely on the N25 billion capitalization as a determinant of a bank’s good performance but should also concentrate on efficient and effective bank management supervision
References
- Abreu, M. and V. Mendes (2001). “Commercial Bank interest margins and profitability: Evidence from E.U countries”, Porto, Working paper series, Available at: http://www.iefs.org.uk/Papers/Abreu.pdf.
- Aburime, T. and C.U. Uche (2008). “Impact of share capitalization on bank profitability in Nigeria”, European Journal of Scientific Research, 19(3), 438–452.
- Ariccia, D. G. and R. Marquez (2004). “Information and Bank Credit Allocation”, Journal of Financial Economics, 72(1), 185-214.
- Bank of International Settlements (2004). Implementation of Basel II: Practical Consideration. Basel Committee on Bank Supervision. BIS Publication. Bank of International Settlements (2010). “Basel Committee Reaches Agreement on new capital Issue”, Business releases 10.
- Bosede, A.F., O. Olowe, and O. Uwuigbe (2013). “Returns on Investment of Deposit Money Banks (DMBs) in Nigeria”, Journal of Applied Finance & Banking, 3(3), 195-206.
- Central Bank of Nigeria (2010). Measurement of capital adequacy along international standard. Lagos: CBN Publications.