Capital adequacy and operational efficiency of banks in Nigeria

Olarewaju, Odunayo Magret (2015)



This study examined the determinants of banks’ capital adequacy; and determined the influence of bank size on operational efficiency of banks for the period 2004-2013. It also evaluated the influence of capital base of banks on the level of operational efficiency of banks in Nigeria. These were with the view to providing information on operational efficiency as a measure of banks’ performance using Financial Ratio Analysis. Data were collected from both primary and secondary sources. Primary data were sourced through administration of structured questionnaire. Purposive Sampling Technique was used to select two managerial members of staff and one executive director from the head office of each of the 15 quoted banks out of the existing 21 consolidated banks and two representatives of Central Bank of Nigeria totalling 47 respondents who were the people that attended the Central Bank of Nigeria Capital Adequacy Ratio panel. Data on variables such as cost to income ratio, equity to total asset ratio, equity to total loan ratio, debt to total equity ratio, core capital ratio, bank size ratio, bank risk ratio, return on asset, return on equity, credit risk, liquidity structure, total asset, gross domestic product, inflation and deposit structure was also sourced from the Annual Reports and Accounts of selected banks and Central Bank of Nigeria Statistical Bulletin covering 2004 - 2013. The data were analysed using descriptive statistics such as mean, median, mode, standard deviation and inferential statistics such as pool ordinary least squares, fixed effect, random effect estimation and dynamic regression techniques. The results showed that return on asset (z = 2.95, p< 0.05), return on equity (z = -2.53, p< 0.05), credit risk (z = -3.85, p< 0.05), deposit (z = -6.64, p< 0.05) and liquidity (z = -4.00, p< 0.05) were significant determinants of capital adequacy in Nigerian money deposit banks. The results also showed that the influence of bank size on operational efficiency was negative and insignificant (t = -0.08, p>0.05) and that debt to total equity ( t= -3.17, p< 0.05), core capital ratio (t = 4.65, p< 0.05), bank risk (t = -3.89, p< 0.05) were significant in evaluating the influence of capital adequacy on operational efficiency of the Nigerian money deposit banks. Banks like FCMB Bank (t= 2.63, p< 0.05), Fidelity Bank (t = 2.23, p< 0.05) and WEMA Bank (t = 2.45, p< 0.05), had heterogeneous operational efficiency in the year 2009 (t = 3.06, p< 0.05) and year 2010 (t = 3.63, p< 0.05) due to their intrinsic organizational factors such as managerial competence, technological acceptance and timeliness of decision making, towards sustaining operational efficiency. The study concluded that Financial Ratio Analysis was a better method of measuring bank’s operational efficiency.