The Impact of Capital Adequacy on Deposit Money Banks’ Profitability in Nigeria

Abstract

The main objective of this paper is to empirically assess the impact of capital adequacy on Deposit Money Banks’ profitability in Nigeria, taking a case study of five selected banks. The empirical analysis covered the period from 1981 to 2011. The data for the study were obtained from secondary sources including the annual reports and financial statements of the selected banks and Central Bank of Nigeria (CBN) statistical bulletin. The study adopted the Engle and Granger two steps procedure in co-integration. The study revealed that capital adequacy plays an important role in explaining banks Returns On Assets (ROA) which is a measure of banks’ profitability. The positive and significant relationship between capital adequacy and banks’ profitability suggest that banks with more equity capital are perceived to have more safety and such advantage can be translated into higher profitability. The higher the capital ratio, the more profitable a bank will be. Based on the findings, It was recommended that there should be a constant review of minimum capital requirement of deposit money banks in Nigeria to the optimal level. Also Nigeria banks should be well capitalized to enable them enjoy assess to cheaper sources of funds with subsequent improvements in profit levels; this would go a long way to help the public maintain confidence in the banks and also accommodate the credit needs of customers.

Keywords: Capital Adequacy, Banks’ Profitability, Return on Assets (ROA), Deposit Money Banks, Equity to Total Assets Ratio (EQTA)