Capital Adequacy and Return on Equity of Deposit Money Banks in Nigeria

Abstract

Although the Central Bank of Nigeria (CBN) had in the past fifteen years (2005 – 2021) introduced several banking reforms, mainly aimed at increasing the capital base of banks, the deposit money banks are constantly faced with the problems of under-capitalization due to capital-to risk weighted average ratio, insolvency and low qualifying capital balances among others. Hence, this study empirically examined the effect of capital adequacy on return on equity of deposit money banks in Nigeria (2004 – 2022). Capital adequacy was proxied by Total qualifying capital (TQC)), adjusted shareholders fund (tier 1 capital) (ASF)) and capital to risk-weighted asset ratio (CRW) and return on equity (ROE)) which formed the specific objectives of the study. In order to actualize the objective, the study adopted quasi experimental design. The data were sourced from NDIC annual financial statistical bulletin. The data were subjected to inferential such as ADF unit root test, Granger causality test, ARDL model. The result revealed that, total qualifying capital has significant influence on return on equity of money deposit banks in Nigeria. Also, adjusted shareholders fund has significant effect on return on equity of money deposit banks in Nigeria. Capital to risk- weighted ratio was statistically significant and positively related to return on equity of money deposit banks in Nigeria. In conclusion, capital adequacy has significant effect on return on equity of deposit money banks in Nigeria. The researcher recommended that shareholders’ return requirements should be balanced against the capital requirements of the regulators, the expectations of debt investors, customers and other counterparties as regards the bank’s rating, and the economic capital that represents the total risk of the bank.

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