CAPITAL ADEQUACY AND RETURN ON CAPITAL EMPLOYED OF QUOTED DEPOSIT MONEY BANKS IN NIGERIA

CAPITAL ADEQUACY AND RETURN ON CAPITAL EMPLOYED OF QUOTED DEPOSIT MONEY BANKS IN NIGERIA

Author by Dr. James .a Oguntodu

Journal/Publisher: International Journal Of Advanced Research In Accounting, Economics And Business Perspectives

Volume/Edition: 4

Language: English

Pages: 84 - 99

Abstract

This study examines the effect of capital adequacy on financial performance of Deposit money banks quoted in Nigeria. Two hypotheses were formulated following the dependent variable of Return on Capital Employed. The independent variable employed for this study is capital adequacy. Also control variables were introduced which are: Asset Quality, Bank Size, Inflation and Financial Development. The study is based on ex-post facto research design and employed a panel data set involving fourteen (14) deposit money banks quoted in Nigeria over a ten-year period ranging from 2009 to 2017 financial year. The data set was analyzed using descriptive statistics and inferential statistics. The findings revealed that capital adequacy has significant relation with financial performance of DMBs in Nigeria, and this goes in line with the theoretical expectation and in line with the findings of other authors. Banks with adequate capital are perceived to have more safety and such advantage can be translated into higher profitability. In accordance with the results obtained from the regression analysis, with positive and significant relationship between capital adequacy and return on capital employed suggested that banks with more equity capital are perceived to have more safety and such advantage can be translated into higher profitability if truly the capital employed is properly managed. The higher the capital employed, the more profitable a bank should be. The study recommended among others that policy makers in emerging markets such as Nigeria should effectively regulate the capital and the resources owned by the Deposit Money Banks (DMBs) in Nigeria by ensuring that a certain level of capital is kept with the Central Bank of Nigeria (CBN) for DMBs' financial soundness and stability. This will enable them to continue to absorb losses and manage risk exposure with shareholders. Therefore, due attention should be given in ensuring adequate capital, optimum liquidity and adequate size of assets by deposit money banks for better performance.


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