Determinants of Capital Adequacy: An Empirical Study on Selected Commercial Banks in Ethiopia
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Date
2019-11-03
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A.A.U
Abstract
The main objective of the study is to investigate empirically the determinants of CAR in Ethiopian commercial banks and assess the effectiveness of stress testing as an instrument of risk mitigation in selected commercial banks in Ethiopia. The researcher collected secondary sources of panel data over the period 2009-2018 from eight senior commercial banks in Ethiopia selected based on purposive sampling. As the study was conducted at institutional level, purposive sampling technique has been used to select the banks. Hence, eight commercial banks have been selected. Besides, the study is interested in banks that have been operational and whose ages are above 10 years .As it includes quantitative research aspect, it mainly rely on secondary data, therefore, appropriate instruments need to be employed. 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.
Key words: Capital adequacy ratio, Basel norms, Tier capital, Ethiopian commercial banks.