Nigerian Journal of Banking and Financial Issues (NJBFI)

CAPITAL ADEQUACY AND RETURN ON EQUITY OF DEPOSIT MONEY BANKS IN NIGERIA: AN EMPIRICAL ANALYSIS

Abstract

This study investigates the effect of capital adequacy on bank stability in Nigeria, with a particular focus on its impact on return on equity (ROE). Using secondary data from Nigerian deposit money banks over the period from 2010 to 2022, the study employs panel data regression analysis to examine the relationships between capital adequacy, liquidity management, cost-income ratio, bank size, and macroeconomic factors such as asset quality, interest rates, inflation and exchange rates. The findings reveal that capital adequacy (CAR), liquidity management (LM), cost-income ratio (CIR), and bank size (LBSZ) positively influence ROE, indicating their significant role in enhancing bank stability. Conversely, asset quality, interest rates, inflation, and exchange rates have a negative effect on ROE, highlighting the challenges posed by external factors on bank performance. The study further shows that capital adequacy significantly explains variations in ROE, with other variables such as interest rates and bank size exhibiting limited impact. The findings suggest that capital adequacy plays a critical role in strengthening the stability of Nigerian banks, and policy recommendations are made to improve regulatory capital requirements, liquidity management, and asset quality, while also addressing macroeconomic challenges. These findings provide important insights for regulators, policymakers, and financial institutions in fostering a stable banking sector in Nigeria.