Determinants of Capital Adequacy of Commercial Banks in Ethiopia

Abstract

This thesis aimed to see the determinant factors for capital adequacy using seven (7) selected banks operating in Ethiopia from 2007 to 2019. The research conducted different estimation to see the relationship between the dependent variable, Capital Adequacy Ratio (CAR) and independent Variables which include Bank size (SIZE), DAR (Deposit to Asset Ratio), Loan to Asset Ratio (LAR), Loan to Deposit (LTD), Return on Asset (ROA), Return on Equity (ROE), Loan Loss Provision (LPR), and macroeconomic variables (gross domestic product and inflation). The variables SIZE, DAR, LAR and ROE affect CAR negatively whereas ROA and LPR affects positively. Hence, it is recommended that to be sure that banks have adequate adequacy reserve, commercial banks and National Bank of Ethiopia should give attention to the risk associated with banks size, caring of banks loan and deposit, initiating  to  increase  their  return  on  their  asset  and  to  manage  their  equity  return.

Keywords: capital, adequacy and commercial banks, Ethiopia.

DOI: 10.7176/RJFA/11-21-05

Publication date: November 30^th 2020