Estimated Panel Data Effect of Capital Adequacy Ratios and Return on Equity of Selected Microfinance Banks in Nigeria

Abstract

Micro financing is a type of banking service that is provided to unemployed or low-income individuals, or groups who otherwise have no other access to financial services. Ultimately, the goal of microfinance is to give low-income people an opportunity to become self-sufficient by providing a way to save money, borrow money and get insurance. Micro financing provides options to customers with limited resources to promote participation in productive activities or to support a small business. This study examined capital adequacy ratios and performance of quoted microfinance banks in Nigeria. The objective was to investigate the relationship between bank capital adequacy ratios and the return on equity of quoted microfinance banks. Cross sectional data were sourced from Stock Exchange Fact-Book and Financial Statement of the banks from 2013-2021. Return on equity of the microfinance banks were proxy for dependent variable while capital adequacy ratios were proxy by Tier I to Total Capital, Tier II to Total Capital, Adjusted Capital to Risk Assets Ratio, and Capital to Risk Asset Ratio. The Ordinary Least Square (OLS) method of regression, were employed with the aid of E-view statistical package. The study found that Tier 1 capital to Total capital ratio, capital to risk assets ratio, capital to total asset ratio have positive relationship while Tier 2 to total capital ratio and adjusted risk capital ratio have negative relationship. The model summary revealed that the independent variables can explain 64 percent variation on the dependent variable. From the above, the study concludes that capital adequacy ratios have positive and significant relationship with the return on equity of quoted microfinance banks in Nigeria. It recommends that the monetary authority should formulate

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