A Nexus between Capital Adequacy and Profitability in the Nigerian Deposit Money Banks

Abstract

This paper examines the impact of capital adequacy on corporate profitability of selected Deposit Money Banks (DMBs) listed on the Nigerian Exchange Limited (NGX Limited) from 2005 – 2014. The paper is carried out based on the historical panel data analysis. To achieve this objective; an ex-post factor research design was employed. Descriptive statistics as well as fixed-effect and random-effect Generalized Least Square (GLS) regression techniques were used as tools of data analysis. The paper made a modest contribution to the existing body of knowledge as most of the studies done in Nigeria and at international arena were not looking at the regulatory standards or benchmark to assess the capital adequacy and its impact on the profitability performance of banks. However, the bases used to evaluate the impact of capital adequacy on the profitability at times vary with the regulatory rating standards. The findings established that capital adequacy has insignificant positive effect on the DMBs’ profitability proxies represented by ROA and ROE. It was concluded that capital adequacy does not have significant impact on the profitability of the listed DMBs in Nigeria. The paper recommends that DMBs should ensure strict compliance with the benchmark for capital adequacy set by both the CBN and the Basel since they go a long way in improving their performance.