Determinants of Capital Adequacy Ratio: An Empirical Study on Commercial Banks of Ethiopia

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Date

2015-06

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Addis Ababa University

Abstract

This study was conducted to examine bank specific and macroeconomic determinant factors of Capital Adequacy ratios of commercial banks in Ethiopia. To this end, the researcher collected secondary sources of panel data over the period 2002-2013from eight senior commercial banks in Ethiopia selected based on purposive sampling. The research finding revealed that Bank size (SIZE), liquidity (LQR) and Non-Performing Loan (NPL) ratio had positive whereas Inflation (INF) had negative, but insignificant effect on CAR of commercial banks in Ethiopia. The share of deposit (DAR), Loan(LAR), Loan provision (LPR), Bank risk (RAR), Return on equity and Economic growth (GDP) had negative and statistically significant effect on Capital Adequacy ratios of commercial banks in Ethiopia. Furthermore, Return on Asset (ROA) and Net interest Margin (NIM) had positive and statistically significant effect on CAR of commercial banks in Ethiopia. The finding of this study is significant as it revealed to bank managers the relevant factors to take into consideration when they make financial policies to maintain at least the expected required level of CAR. Based on the findings, the study recommends to the management of National Bank of Ethiopia to revise the existing minimum requirement based on Basel III accord and also to influence commercial banks in order to disclose all component of CAR in detail in their annual financial statement

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An empirical study on commercial banks of ethiopia

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