Examine the Impact of Capital Adequacy Ratio and How It Determines the Performance of Deposit Money Banks in Nigeria

Abstract

This study examines the impact of capital adequacy ratio (CAR) on the performance of deposit money banks in Nigeria. Capital adequacy, which reflects a bank’s ability to absorb financial shocks and maintain stability, remains a critical indicator of financial soundness and regulatory compliance. The study adopts a longitudinal research design using secondary data obtained from the financial statements of eight (8) selected deposit money banks in Nigeria over a nine-year period spanning 2014–2022. The analysis employs regression techniques to evaluate the relationship between capital adequacy ratio (CAR) and bank performance, measured by Return on Equity (ROE). Findings reveal that capital adequacy ratio has a positive relationship with bank performance, with a regression coefficient of 0.058407, indicating that an increase in CAR leads to an improvement in ROE. However, the relationship is statistically insignificant, as evidenced by a p-value of 0.3346, suggesting that capital adequacy does not significantly determine the performance of deposit money banks in Nigeria within the study period. The study concludes that although higher capital adequacy enhances the capacity of banks to absorb losses and improve profitability, its effect on performance is not statistically significant. It recommends that deposit money banks strengthen their capital base while also improving credit risk management practices, ensure strict compliance with regulatory requirements such as the Banks and Other Financial Institutions Act (BOFIA) and prudential guidelines, and adopt efficient financial strategies to enhance overall performance.