Effect Of Capital Adequacy On Performance Of Nigerian Banks Using Basle Iii Accord Framework

Banks in Nigeria over the years are confronted with capital adequacy (equity needed to absorb any unexpected shocks) problem which had consequential effects on their performance. Banks according to the capital adequacy standard set by Banks for International Settlements (BIS) requires primary capital base equal to at least eight per cent (8%) of their assets. Since the bank specific characteristics differ in Nigeria, the CBN set an arbitrary N25 billion minimum capital base after considering all capital adequacy variables (total assets(TA), owners fund (LA), customer’s deposit (CD) and loans and advances (OC) to forestall all future financial downturn. This study in this regard examines the relationship between these variables on banks performance in Nigeria using secondary data collected from the nine deposit money banks with significant foreign operations. The data were analysed using panel methodology and the
results of the OLS regression show that 76% (R2) of the variations in PAT are caused by the independent variables. Further findings showed that a unit change in TA, LA, CD and OC lead to 4.1%, 1.6%, 3.7% and 1,7% change in PAT respectively. The study concludes that capital adequacy impacts significantly and positively on bank performance in Nigeria. It was therefore recommended that the Central Bank of Nigeria (CBN) should not only focus on capital adequacy but also consider external/macroeconomic variables that impacts on performance, emphasize supervisory review and market discipline with a view to maintain banks financial strength and stability in Nigeria.